SC directs banks to grant opportunity of hearing to borrowers before classifying their accounts as fraud

The top court emphasized the importance of the principles of natural justice while classifying an account as fraudulent by banks

PGurus Newsdesk

March 27, 2023

The top court emphasized the importance of the principles of natural justice while classifying an account as fraudulent by banks

Can’t declare a borrower ‘fraud’ without hearing him first: SC tells RBI

On Monday, the Supreme Court of India said borrowers must be accorded a hearing before an account is classified as “fraud” and a reasoned order must follow if such an action is taken. This comes as a huge setback for banks that follow a central bank circular for classifying frauds.

A bench headed by Chief Justice of India D Y Chandrachud and Justice Hima Kohli affirmed the order passed by Telangana High Court and set aside the contrary view taken by the Gujarat High Court.

The bench said the decision classifying borrower accounts as fraudulent must be with reasoned order and further added that debarring borrowers from accessing institutional finances causes severe impact on borrowers and is similar to blacklisting of borrowers, which impacts the credit score.

It held that the principles of “audi alterm partem” must be read into the circular issued by the Reserve Bank of India (RBI) on the classification of bank accounts as fraud.

The bench stressed that the opportunity for a hearing must be granted for the borrowers under the master directions on fraud. The judgment on the matter will be uploaded later in the day.

A 2016 circular by the RBI allowed the banks to declare the willful defaulters as “fraud”. The Master Circular on “Frauds – Classification and Reporting” was issued under Section 35 A of the Banking Regulation Act, 1949. It was updated on July 3, 2017.

The apex court today said that the declaration was “tantamount to blacklisting of borrowers from accessing institutional finance”.

[With Inputs from IANS]

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