New Delhi, March 27.
The Supreme Court ruled on Monday that banks would have to hear our borrowers before declaring their accounts as fraud. The bench clarified that no such opportunity need be given before an FIR is lodged and registered.
“Classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences against the borrowers,” the bench said.
It also bars borrowers from accessing institutional finance under. Such blacklisting is akin to borrowers being declared as untrustworthy and unworthy of credit by banks, the bench, comprising Chief Justice of India D.Y. Chandrachud and Hima Kohli, said.
The principles of natural justice demand 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 their case before their account is classified as fraud under the Master Directions on Frauds, it said.
In addition, the decision classifying the borrower’s account as fraudulent must be made by a reasoned order.
The bench accordingly upheld the Dec 10, 2010, Telangana High Court order, holding so, and set aside a Gujarat High court order refusing to do so. Banking regulator RBI and the banks had challenged it in the top court.
The top court said that the principles of natural justice would have to be read into the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select Financial Institutions) directions 2016, to prevent the vice of arbitrariness.
Some borrowers had challenged the directions as arbitrary on the ground that though they provided an opportunity of hearing to third parties, it was denied to borrowers.
It also affected their fundamental right to reputation, they argued. The bench agreed.
Although the purpose and object of the Master Directions on Frauds is speedy detection and reporting of fraud to law enforcement agencies, such exigencies cannot be a valid ground to exclude the applicability of the principles of natural justice, it said.
The bench also said that banks must past reasoned orders while declaring any account as a fraud as it allows an aggrieved party to demonstrate that the reasons which persuaded the authority to pass an adverse order against the interests of the aggrieved party are extraneous or perverse.
This obligation to record reasons acts as a check on the arbitrary exercise of the powers, it said. The reasons may be brief but they must comport with fairness by indicating a due application of mind.
