Banks must hear borrowers before declaring fraud: SC

NEW DELHI: An opportunity of hearing must be given to an account holder before a loan account is declared fraudulent under the Reserve Bank of India's (RBI) Master Circular of 2016, the Supreme Court ruled on Monday, reading the principles of natural justice into the banking regulator's directive and holding that such measures affect the right to reputation.

- Utkarsh Anand

Settling the point of law in the wake of contradictory decisions by different high courts, a bench headed by Chief Justice of India Dhananjaya Y Chandrachud held that an audience to the borrower followed by a reasoned order must be read into the RBI's circular for it to be saved as a constitutional directive even as no such hearing was required at the stage of reporting a criminal offence. "We hold that the principles of natural justice, particularly the rule of audi alterampartem (right to audience), has to be necessarily read into the Master Directions on Frauds to save it from the vice of arbitrariness. Since the classification of an account as fraud entails serious civil consequences for the borrower, the directions must be construed reasonably by reading into them the requirement of observing the principles of natural justice," said the bench, which also comprised justices Hima Kohli.