Supreme Court: Banks Must Give Opportunity of Hearing to Borrowers Before Classifying the Accounts of Them as Fraud

The Supreme Court in the case State Bank of India vs Rajesh Agarwal observed and has held that the borrowers must be heard before their accounts are being qualified as fraud. It has also been held by the court that the principles of “audialterm partem” must be read into the Circular being issued by the Reserve Bank of India on the classification of bank accounts as the fraud accounts.

The bench comprising of Chief Justice of India DY Chandrachud and Justice Hima Kohli in the case observed and has upheld the judgment passed by the Telangana High Court in December 2020, wherein the court held the same. Therefore, the bench also set aside the judgment of the Gujarat High Court which held to the contrary. It has also been noted by the bench that the classification of accounts as fraud wherein it resulted serious civil consequences for borrowers, amounting to “blacklisting” of borrowers, thus the borrowers must be granted the opportunity of hearing under the Master Directions on Fraud.

In the present case, the court is to give the opportunity of hearing by the banks to the borrowers before classifying the accounts of them as fraud under the Master Directions on Fraud. The said decision is to be made in a reasoned order and it cannot be presumed by the court that the Master Circular excludes the principles of natural justice.

Further, it has been held by the Telangana High Court that the principles of audi alteram partem, wherein have to be applied before declaring a party as ‘a fraudulent borrower’ or as the holder of fraudulent account’