SC rules in favor of borrowers, says banks must grant hearing before declaring accounts as fraud

New Delhi (India), March 27, 2023: The Supreme Court has dealt a major blow to banks that classify accounts as fraud without giving borrowers a fair hearing. In a recent ruling, the apex court held that borrowers must be heard before their accounts are declared fraudulent, thus upholding a 2020 order by the Telangana high court that had been challenged by the centre.

The court’s decision could have serious civil consequences for borrowers, it observed.

The bench, headed by Chief Justice of India DY Chandrachud, noted that banks must grant an opportunity for a hearing to borrowers under the Reserve Bank of India’s master circular. The court emphasized reading the “audi alterm partem” principle, which means hearing the other side, with the master circular. The RBI circular cannot be presumed to exclude the principle of natural justice, it added.

The court’s ruling has also set aside a Gujarat high court judgment that was contrary to the Telangana high court’s decision. The RBI circular cites Indian Penal Code (IPC) provisions, including misappropriation, fraudulent transactions, cheating, and forgery, for the classification of accounts as fraud.

The former directors of Anil Ambani’s Reliance Communications and others had moved different high courts over their accounts being labeled as fraudulent and sent to the CBI for investigation. The State Bank of India (SBI) and other banks had forwarded complaints of fraud against Reliance

Communication began with the CBI two years ago, but the agency couldn’t file a case because the Delhi High Court had ordered the status quo. This ruling by the Supreme Court could have far-reaching consequences for banks and borrowers alike as they navigate the complex terrain of financial fraud.