The Supreme Court (SC) has ruled that borrowers are not entitled to a personal hearing before banks classify their loan accounts as “fraud” under Reserve Bank of India (RBI) directions. The judgment brings finality to a contentious issue that has seen conflicting rulings from different high courts (HCs).

The apex court clarified that borrowers must be given access to the forensic audit report on which the classification is based. Banks, however, may redact portions affecting third-party rights, a Bench of Justices J B Pardiwala and K V Viswanathan held.

The court observed that compliance with principles of natural justice is satisfied if banks issue a show-cause notice, consider the borrower’s written response, and pass a reasoned order. While acknowledging that the nature of natural justice is flexible, the court cautioned that such principles “cannot be cut and dried or nicely weighed and measured”.

Clarifying its 2023 ruling, the court held that the requirement for a hearing does not extend to a personal or oral hearing. The earlier judgment contemplated a written opportunity to respond to the findings of a forensic audit and the proposed action.

The court held that the procedure under the RBI’s 2024 Master Directions — including issuance of a detailed show-cause notice, granting time to reply, and passing a reasoned order — satisfies the principle of audi alteram partem (Latin for ‘hear the other side’).

Rejecting borrowers’ plea for full disclosure, the Bench said banks are not required to furnish the entire forensic audit report before classifying an account as fraud. Disclosure of the relevant conclusions forming the basis of the show-cause notice is sufficient.

The court also observed that fraud classification relies on documentary material such as financial statements and transaction records, which are typically already within the borrower’s knowledge. Requiring oral hearings in every case would delay the detection and reporting of fraud.

Referring to RBI data, the court highlighted the scale of the problem, noting thousands of fraud cases involving tens of thousands of crores reported annually. Fraud cases fluctuated sharply over recent years: 13,494 cases involving ?18,981 crore in 2022-23; 36,060 cases involving ?12,230 crore in 2023-24; and 23,953 cases involving ?36,014 crore in 2024-25. Fraudulent advances accounted for the bulk of the amounts involved.

In 2024-25, such cases numbered 7,950 but involved ?33,148 crore, over 90 per cent of the total value. By contrast, card and internet frauds numbered 13,516 but involved ?520 crore, showing that while retail frauds dominate in volume, high-value frauds are concentrated in lending operations.

On bank-group-wise data, public sector banks reported 6,935 cases involving ?25,667 crore in 2024-25 — over 71 per cent of the total amount. Private banks reported 14,233 cases involving ?10,088 crore, and foreign banks had 1,448 cases involving ?181 crore.

The court recorded that as of March 31, 2025, 783 fraud classifications involving ?1.12 trillion had been withdrawn due to non-compliance with natural justice principles, following its March 27, 2023, ruling in State Bank of India (SBI) vs Rajesh Agarwal.

While acknowledging that fraud classification carries serious civil consequences, including denial of access to institutional finance and reputational harm, the court held that these do not necessitate a personal hearing in every case.

The ruling arose from appeals by banks, including SBI, challenging HC decisions that had mandated personal hearings and full disclosure of forensic audit reports.

While the Delhi HC deemed a personal hearing mandatory, the Bombay HC had ruled that only a right of representation was required. The SC also set aside the Calcutta HC’s ruling that required a personal oral hearing before declaring an account fraudulent.

Upholding the RBI’s framework, the SC clarified the procedural safeguards required before classifying accounts as fraudulent.

Experts say the ruling is bank-friendly, removing a procedural hurdle borrowers used to challenge fraud tagging and allowing banks to act faster and with certainty.

“However, the safeguard now shifts to the quality of the written process — defective show-cause notices, non-disclosure of material, or predetermined conclusions can still be challenged. The judgment prioritises regulatory speed while retaining a narrower, enforceable standard of procedural fairness,” said Raheel Patel, partner at Gandhi Law Associates.

Hormuz Mehta, partner at JSA Advocates & Solicitors, said the ruling brings clarity for banks, enabling them to complete fraud classification within the prescribed timeline without the risk of HCs overturning decisions solely because a personal hearing was denied.

“By this order, personal hearings are no longer mandated, ensuring there is no delay in the 180-day classification process. This allows an expedited and efficient process while maintaining fairness,” he said.

Yash B Joglekar, counsel practising before Bombay HC, said the court has eased a process increasingly stalled at the threshold.

“The decision is likely to narrow the scope of challenges — borrowers will find it harder to contest fraud declarations on procedural grounds alone, shifting the focus to adequacy of notice, disclosure of material, and whether the decision reflects proper application of mind,” he said.