Borrowers not entitled to mandatory personal hearing by banks before declaring accounts as fraudulent: SC

New Delhi: The Supreme Court on Tuesday said that borrowers are not entitled to a mandatory personal hearing before banks classify their accounts as fraud under Reserve Bank of India rules.

A bench of Justices J B Pardiwala and K V Viswanathan felt that affording such an opportunity to recalcitrant borrowers, who hold depositors’ money, would enable them to dissipate assets, destroy evidence or abscond, causing enormous prejudice to the public interest.

The court noted that the RBI, considering the fact that frauds in accounts are of various hues, opined that granting a right of personal hearing to every borrower would be practically inexpedient, given the large volume of cases that have already arisen.

Moreover, the bench highlighted, the classification of fraud is predominantly based on documentary evidence such as financial statements, transaction records, stock statements and, security valuations and other documentary evidence.

The bench said an oral hearing is bound to convert an administrative process, intended to be swift, into a protracted one, defeating the very purpose of the exercise.

"It would also cause significant logistical and infrastructural burden apart from providing opportunity to recalcitrant borrowers who are in possession of the money of the depositors to dissipate assets, destroy evidence or even abscond causing enormous prejudice to public interest," the bench said.

In its 106-page judgment, the bench said it will also put public money in jeopardy as borrowers will continue to enjoy exposures from banks and logistically, it will seriously encumber the working hours of the bank officials.

The court agreed with an apprehension that if a personal hearing is recognised as a right, multiple directors may seek multiple personal hearings, which will throw banking operations into disarray.

The bench said more importantly, in the ultimate analysis, the exercise of classification of accounts, is in the broad sense a housekeeping due diligence, internally carried out by the bank.

"The process of a show cause notice with the supply of the evidentiary material, consideration of the representation and the mandate to pass a reasoned order are more than adequate safeguards. This balances the need for promptitude with the requirement to maintain fairness in action," the court said in its interpretation of the RBI's master directions on fraud risk management.

The court set aside the Calcutta High Court's judgment, which relied on the Supreme Court's 2023 decision in State Bank of India Vs Rajesh Agarwal, to direct the appellant bank to grant the respondent a personal oral hearing before declaring his account as fraudulent.

Rejecting the contention that such a hearing is mandatory, the bench said the principles of natural justice are flexible and depend on the nature of the proceedings and a statutory framework.

The bench explained Rajesh Agarwal judgment (2023) did not recognise any right in the borrower to a personal hearing by the banks before classifying their account as a fraud account.