NEW DELHI: The Supreme Court on Monday said banks should provide a reasonable opportunity of hearing and representation before classifying a borrower’s account as fraud. The apex court said the principles of natural justice demand that the borrowers must be given an opportunity to explain the conclusions of the forensic audit report.
Upholding a 2020 order of the Telangana high court, a bench of Chief Justice DY Chandrachud and Justice Hima Kohli said the classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences for the borrowers.
“Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud.”
The judgement was delivered on pleas relating to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 which were challenged before different high courts primarily on the ground that no opportunity of being heard is envisaged to borrowers before classifying their accounts as fraudulent.
Elaborating on the consequences when a borrower’s account is declared fraud, the apex court said this virtually leads to a credit freeze for the borrower, who is debarred from raising finance from financial markets and capital markets.