The Supreme Court on Monday held
that the banks must hear the borrowers before classifying their accounts as
fraud. The bench comprising chief justice of India (CJI) DY Chandrachud and
justice Hima Kohli said that classifying accounts as fraud results in serious
civil consequences for the borrowers, including "blacklisting" of the
accounts.
The apex court upheld a
judgement passed by the Telangana High Court in December 2020 stating that the
principles of "audi alteram partem" must be applied before declaring
a party as "a fraudulent borrower" or "a holder of fraudulent
account".
"Audi alteram partem"
means "hear the other side" or "no man should be unheard, both
the parties have an opportunity of being heard".
"Declaration of fraud
entails penal and civil consequences, amounts to blacklisting from accessing
institutional finance...Bank order must show reasons behind the declaration of
fraud, reasons will keep banks from exercising powers arbitrarily," the
court said.
A 2016 circular by the Reserve
Bank of India (RBI) allowed the banks to declare the willful defaulters as
"fraud". The Master Circular on "Frauds – Classification and
Reporting" was issued under Section 35 A of the Banking Regulation Act,
1949. It was updated on July 3, 2017.
The SC on Monday said that the
declaration was "tantamount to blacklisting of borrowers from accessing
institutional finance".
Along
with the RBI, the State Bank of India (SBI) had also cautioned against tweaking
the circular to ensure early detection of fraud cases.
The
borrowers had argued that the circular violates principles of natural justice
and said that it "hurt the ability to raise fresh credit after
declaration".