A borrower must be accorded a hearing before an account is classified as “fraud” and a reasoned order must follow if such an action is taken, the Supreme Court said on Monday. A classification of accounts as fraud results in civil consequences for borrowers and hence, an opportunity of hearing must be given to such persons, it added.

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

The decision classifying the borrower account as fraudulent must be followed by a reasoned order, it said. The verdict came on a plea of the State Bank of India, news agency PTI reported.

A borrower account is declared as fraud based on the findings of a forensic report where the loan has become a non-performing asset (where interest or principal payment is overdue for 90 days).

The bench 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 opportunity of hearing must be granted for the borrowers under the master directions on fraud.

Both RBI and the lenders had challenged the High Court’s December 10, 2020 ruling that asked them to ensure that the clauses in the Master circular issued for detecting frauds in the banking sector, include the principles of natural justice in order to give an opportunity to the affected party/person to present their case, lest the circular be unconstitutional.

RBI and the lenders told the SC that the HC providing an opportunity of hearing to the borrower before classifying and reporting loan frauds may defeat the very purpose of the 2016 circular – early detection of fraud and prompt reporting of the same.

Rajesh Agarwal of BS Company Ltd had moved in HC seeking to declare the RBI circular relating to fraud loan accounts as arbitrary as it violated the principle of natural justice in as much as there is no provision for an opportunity of hearing before an account is classified and reported as fraud.

The BS Company’s account was declared as a fraud on February 15, 2019, by the SBI-led consortium in tune with the RBI circular. The company took loans of Rs 1,400 crore and defaulted on repayment.

As the forensic audit of the company accounts revealed discrepancies, the SBI and other banks formed to a joint lenders’ forum (JLF) and initiated action against Agarwal’s bank account. The fraud identification committee (FIC) also recommended action against the account of Agarwal.

(With agency inputs)

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