Grant Opportunity Of Hearing To Borrowers Before Bank Account Classified As Fraud: SC

In an order dated March 27, 2023, the Supreme Court held that borrowers have to be provided with an opportunity of being heard before their bank accounts are classified as fraudulent and failure to do so violates principles of natural justice.

The master directions issued by the Reserve Bank of India (RBI), called the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 were challenged before several High Courts as they do not expressly provide the borrowers with an opportunity of being heard before their accounts are declared as fraudulent.

The borrowers contended that such a classification results in serious civil consequences and also has a bearing on their reputation. On the other hand, the RBI and the lender banks asserted that the classification of accounts as fraud is done only for reporting purposes and the final decision regarding the fraud would only be taken by courts of law. Hence, they insisted that the principles of natural justice are not applicable at this stage.

Rejecting the contentions of the RBI and the lender banks, the court held that the “borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the Master Directions on Frauds”.

The proceedings concluded with the court directing that a copy of the audit reports be shared with the borrowers and a reasonable opportunity to submit a representation be given to the borrowers before their accounts are classified as fraud.