NEW DELHI: The Supreme Court has asked why banks resist offering borrowers an opportunity to be heard before classifying their accounts as “fraudulent,” pressing the State Bank of India and the Reserve Bank of India to explain what prejudice such hearings might cause. The matter, rooted in the RBI’s 2016 fraud-classification norms, reopens the debate on the balance between due process and financial integrity.
A Question of Natural Justice
On Tuesday, a bench of Justices J.B. Pardiwala and K.V. Viswanathan questioned banks’ opposition to personal hearings for borrowers whose accounts are on the verge of being declared fraudulent. “What prejudice would be caused to banks if an opportunity of hearing is provided?” the bench asked, underscoring that at least one chance to respond must be afforded to borrowers.
The observation came during the hearing of a petition filed by the State Bank of India (SBI), challenging a Calcutta High Court order that favored borrowers’ right to be heard under the Reserve Bank of India’s 2016 Directions on Frauds Classification and Reporting by Commercial Banks and Select FIs. These directions—intended to strengthen accountability and transparency in fraud detection—had faced multiple challenges in different high courts, primarily over the absence of an explicit hearing provision for borrowers before being branded as fraudulent.
Revisiting the 2023 Supreme Court Verdict
Appearing for SBI, Solicitor General Tushar Mehta cited the apex court’s March 2023 verdict, which upheld the RBI circular but clarified that borrowers must be given an opportunity to explain their position before fraud classification. The judgment emphasized the “principles of natural justice,” requiring banks to issue a notice, furnish audit findings, and allow a reasonable opportunity for representation before labeling an account as fraudulent.
“Consistent with the principles of natural justice, the lender banks should provide an opportunity to the borrower by furnishing a copy of the audit reports and allowing them a reasonable opportunity to submit a representation,” the 2023 verdict had observed.
The Court had also directed that any such decision must be made through a reasoned order, not an administrative declaration. However, Mehta argued that the 2023 ruling should not be read as mandating oral or personal hearings, stating that no bank currently follows such a procedure.
“There may be situations where affording a personal hearing would defeat the very purpose of declaring the account fraudulent,” he said.
The Court’s Pushback
The bench appeared unconvinced by this reasoning.
“If a show-cause notice is issued, and a reply is to be called for and examined, what is the problem in giving a personal hearing?” the judges asked.
They pressed Mehta to explain how such a hearing could prejudice banks or hinder fraud detection. Over two years after the 2023 judgment, the Court noted, many banks must already have issued show-cause notices under similar circumstances. The justices sought to understand why the SBI—and by extension, the banking system—remained resistant to granting even minimal oral hearings.
Senior advocate K. Parameshwar, appearing for the respondents, contended that written exchanges alone were insufficient to ensure fairness and that natural justice required a meaningful chance to respond before reputationally devastating classifications like “fraudulent account” are finalized.
RBI Drawn Into the Debate
Given the procedural implications, the Court directed the RBI to be made a party respondent, scheduling the next hearing for November 18. It also asked the SBI to detail the “peculiar contingencies” that might justify denying borrowers a personal hearing, if such exceptions truly exist.
Mehta pointed out that under the RBI circular, a forensic audit forms a key stage in the fraud-detection process—one where account holders already interact with auditors. He maintained that a written reply following a notice sufficed for procedural fairness. But the bench appeared unconvinced, noting that the heart of the issue lies not in audit participation but in the right to be heard before judgment is passed.
As the debate returns to the nation’s highest court, the question remains whether banks’ administrative efficiency can outweigh the borrowers’ right to natural justice—or whether due process must prevail, even in the high-stakes realm of financial fraud.
