Let us get the fundamentals clear:
1) I assume that the Payment of Wages Act is applicable.
2) I assume that the loan is from a cooperative bank or a cooperative society.
Legal Position
If these assumptions are correct, the legal position is:
1) Yes, the employer is authorized to deduct installments and send these to the cooperative bank/cooperative society.
2) Not only that, under the Cooperative Society Act, it is mandatory to deduct the said installments and remit them.
3) If the employer fails or refuses to comply with this position, then the concerned cooperative institute is entitled to recover these from the said employers as "arrears of land revenue" by following due legal process.
Other Noteworthy Points
1) There cannot be TWO or more loans outstanding against an individual. (Cooperative institutes often violate this.)
2) While the total deduction from the earned wages of an employee cannot be more than 50% under normal circumstances, if there is a cooperative loan, the deduction can go up to 75% of earned wages.
3) The Payment of Wages Act stipulates under Sec 6 or 7 the various deductions that can be made by the employer and the conditions attached.
If any doubts are created by this response, you may revert!
Regards,
Samvedan
December 22, 2012