New Delhi, April 7 The Supreme Court on Tuesday said that borrowers are not entitled to a mandatory personal hearing before their accounts are classified as fraudulent by banks under the rules laid down by the Reserve Bank of India (RBI).
A bench of Justices J B Pardiwala and K V Viswanathan overturned the Calcutta High Court's ruling, which had relied on the Supreme Court's 2023 ruling in State Bank of India (SBI) versus Rajesh Agarwal to direct the appellant bank to grant the respondent a personal oral hearing before declaring his account as fraudulent.
"Audit reports are available, including forensic audit reports, and these shall be furnished to the borrower, along with their representation on the report, including on the findings and conclusions. If the banks consider the audit report relevant for classifying the account as a fraudulent account, their representation should be elicited," the bench said.
The top court, while interpreting the RBI's master directions on fraud risk management, observed that the issuance of a show-cause notice, furnishing of relevant material, consideration of the borrower's reply, and passing of a reasoned order are sufficient to meet the requirements of fairness.
Rejecting the contention that such a hearing is mandatory, the court said that the principles of natural justice are flexible and depend on the nature of the proceedings and the statutory framework.
"Providing copies of the audit report, including the forensic audit report, to the borrower is mandatory. Providing reports in digital form will be valid compliance," the court said.
The bench noted that the classification of accounts as fraudulent is largely based on documentary evidence such as financial records, transaction details, and audit reports, making personal hearings unnecessary in most cases.
It further said that insisting on personal hearings in every case would delay the process, defeat the objective of timely detection of fraud, and could enable borrowers to dissipate assets or interfere with investigations.
The court clarified that earlier rulings of the top court, including in the Rajesh Agarwal case, did not mandate a personal hearing but only required adherence to basic procedural safeguards like notice and opportunity to respond.
"We are persuaded to accept the stand of the RBI that the procedure of issuing a show cause notice, furnishing of the evidentiary material, eliciting a reply, and the obligation to pass a reasoned order will meet the requirements of fairness and also thwart miscarriage of justice," the bench said.
Highlighting the broader objective of protecting the banking system and public funds, the court said that procedural fairness must be balanced with the need for prompt and effective action against financial frauds.