By Arpan Chaturvedi and Siddhi Nayak
NEW DELHI (Reuters) – Indian banks must give defaulters an opportunity to be heard before they classify a loan account as fraud, the Supreme Court ruled on Monday.
Banks cannot unilaterally declare an account as fraud without providing the defaulter the right to be heard, a top court bench led by Chief Justice DY Chandrachud said.
However, there is no such requirement before registering a first information report (FIR) to declare a loan account as fraud, the bench observed.
The apex court was examining judgements by the Telangana High Court and Gujarat High Court on the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select Fls Directions 2016) master circular.
The master circular asked banks to classify accounts of wilful defaulters as fraudulent. This circular was challenged in multiple courts.
Telangana High Court had ruled that not granting the right to be heard infringes on the borrowers’ constitutional right.
“Classification of an account as a fraud not only results in reporting the crime to investigating agencies but also has other penal and civil consequences against the borrowers,” the top court said in its oral ruling.
Principles of natural justice demand that borrowers must be served a notice giving an opportunity to explain the conclusion of the forensic audit report and be allowed to represent themselves in front of the lenders before their account is classified as fraud under the master directions, the court said.
(Reporting by Arpan Chaturvedi and Siddhi Nayak;Editing by Dhanya Ann Thoppil)
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