Category: Personal Finance

The Reserve Bank of India and the SBI-led consortium of lenders on Thursday sought the Supreme Court’s view on whether an opportunity of personal hearing is required to be given by a lender to a borrower before classifying its account as fraudulent as per the Master Circular of July 1, 2016.

Both RBI and the lenders have challenged the Telangana High Court’s December 10 ruling that asked them to ensure that the clauses in the ‘Master Direction on Frauds – Classification and Reporting by Commercial banks and select FIs,’ issued by the banking regulator for detecting frauds in the banking sector, include the principles of natural justice in order to give an opportunity to the affected party/person to present their case, lest the circular be unconstitutional.

A bench led by Justice R F Nariman refused to stay the entire HC judgment, but stayed a part which dealt with granting of personal hearing to a borrower/account holder. It also sought response from Rajesh Agarwal of BS Company, who had moved in HC seeking to declare the RBI circular relating to fraud loan accounts as arbitrary as it violated the principle of natural justice in as much as there is no provision for opportunity of hearing before an account is classified and reported as fraud.

The apex court posted the matter for further hearing in July.
RBI and the lenders told the SC that the HC providing an opportunity of hearing to the borrower before classifying and reporting loan frauds may defeat the very purpose of the 2016 circular — early detection of fraud and prompt reporting of the same.

Stating that the reporting by a bank of an account as fraud is never arbitrary, solicitor general Tushar Mehta and senior counsel Rakesh Dwivedi, appearing for SBI and RBI, respectively, argued that the classification of fraud is for sharing the information with other banks, on a private and secure basis; the data on frauds is accessible to only the authorised officers of the banks to enable them to exercise due caution while dealing with such parties, RBI further said that once a fraud is reported by a bank, it is important that other banks are sensitised regarding the fraud.

After identification of fraud, it is mandatory to immediately file a complaint with law enforcement agencies so that to avoid loss of relevant relied upon documents, non-availability of witnesses and absconding of borrowers and also money trail getting cold in addition to asset stripping by the fraudulent borrower, RBI stated.

According to the petitions, “before reporting a fraud, banks rely on internal or/and external audits/examination, and fraud is classified and reported mainly based on the provisions of IPC. Banks would have to satisfy one or more of the provisions… There is also a criminal element in ‘frauds’ unlike in the case of ‘wilful default’. Such criminal element ascertained by banks leads to their decision on identifying the ‘fraud’ and immediate reference of case to police/investigation agencies.”

Senior counsel Mukul Rohatgi, appearing for Agrawal, opposed any stay, saying the HC judgment was based on the apex court’s ruling in case of Jha Developers which dealt with the wilful defaulters, which is a “milder declaration than being called a fraud.”

The BS Company’s account was declared as fraud on February 15, 2019 by the SBI-led consortium in tune with the RBI circular. The company took loans of `1,400 crore and defaulted on repayment. As the forensic audit of the company accounts revealed discrepancies, the SBI and other banks formed to a joint lenders’ forum (JLF) and initiated action against Agarwal’s bank account. The fraud identification committee (FIC) also recommended action against the account of Agarwal.