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Informist, Tuesday, Apr. 7, 2026

 

--SC: Borrower has no right to get personal hearing from bk on fraud account 

--SC: Bks should give forensic audit reports to borrowers on fraud accounts 

--CONTEXT: SC on lenders plea on declaring borrowers' account as fraud

 

NEW DELHI – The Supreme Court Tuesday held that borrowers have no right to a personal hearing from banks before their accounts are classified as fraud. A fraud account under the Reserve Bank of India's Master Directions is a bank account, loan, or financial asset where fraudulent intent, such as misappropriation, forgery, or wilful deception, is suspected or proved.

 

The RBI (Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions) Directions, 2024, which call for the issuance of a show-cause notice to borrowers and give them time to reply strikes a fair balance between promptitude and fairness, the court said. The RBI Master Directions, 2024, duly comport with the principles of natural justice ensuring fairness to the borrower whose account is likely to be classified as a fraud account, said the bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan.

 

However, the disclosure of forensic audit reports by banks to borrowers is mandatory in case the lenders consider it relevant for classifying an account as fraudulent, the court said. If the banks, for reasons to be recorded, establish that the disclosure of any part of the report would affect the privacy of third parties, in that exceptional situation they would be justified in withholding those portions of the report that concern third party rights, it said. Even in those exceptional cases, the court hoped banks would not unreasonably use the power of redaction since that would only end up delaying the culmination of proceedings.

 

"...we are not impressed with the argument(of borrowers) that the RBI having granted personal hearing to the banks in the Master Circular dated Jul. 30, 2024, on 'wilful defaulter' ought to provide a personal hearing while classifying accounts as 'fraud accounts'," the bench said. The classification of accounts under the circular on wilful default is on distinct grounds from the classification of fraud accounts, it said.

 

The process of issuing a show-cause notice with the supply of evidentiary material, consideration of representation, and mandate to pass a reasoned order are more than adequate safeguards before declaring a borrower's account as fraud, the court ruled. This balances the need for quick action with the need for fairness, it said. Imposing a compulsory layer of personal hearing in every case would lead to an increase in the workload of banks and delay decision-making, it said. The court added that its 2023 order had not recognised any right of a borrower to a personal hearing by banks.

 

The court also rejected the lenders' argument that giving the entire audit report to borrowers would make it a subject matter of criminal investigation. Once criminal proceedings are launched, the investigating authority will independently investigate and file a charge sheet of which the forensic audit report may be a part, the court said.

 

The court noted that data provided by the RBI on fraud cases was "alarming". The amounts involved for the financial year 2022-23 (Apr-Mar), FY24, and FY25 were, respectively, INR 189.81 billion, INR 122.30 billion, and INR 360.14 billion, it said. The data was provided in respect of frauds of INR 100,000 and above.

 

The apex court was hearing petitions from the State Bank of India and other banks on the issue of declaring borrowers' accounts as fraud and giving forensic audit reports to them. The court impleaded the RBI in the case for its inputs.

 

The RBI argued that prescribing a personal hearing for every borrower before classifying an account as fraud was neither warranted nor practicable. Not only would this have undesirable consequences, but it would also have the potential to undermine the very objective of its directions, which was to ensure timely and speedy detection and reporting of frauds, the central bank said.

 

The banks also argued that granting a personal hearing would defeat the purpose of the RBI Master Directions, 2024, and cause them prejudice by creating stumbling blocks for the early and timely detection and reporting of frauds, early and timely reporting of frauds to the investigative agencies, and faster dissemination of details of frauds and fraudulent borrowers to other banks to enable them to take preventive measures. 

 

Tuesday, shares of State Bank of India ended slightly lower at INR 1,030.40 on the National Stock Exchange.  End

 

Reported by Surya Tripathi

Edited by Rajeev Pai

 

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