Banks Can Tag Loan Fraudulent Without Personal Hearing: SC

A bench, headed by Chief Justice of India Dhananjaya Y Chandrachud, however, asked SBI to file a review petition after the bank sought another clarification to hold that the March judgment of the top court will apply only prospectively and those already proceeded against under the 2016 Master Circular cannot demand an opportunity of hearing, citing the latest verdict.

“In our judgment, we have not said that a hearing would mean a personal hearing...We have not said you give a personal hearing to everyone. Proceed on the premise that an opportunity has to be given which can mean a representation too. If someone says he needs an oral hearing, then you decide appropriately," the bench told solicitor general Tushar Mehta, who appeared for SBI.

Mehta, however, pointed out the 27 March judgment of the apex court doesn’t say whether a hearing would mean a personal hearing or a representation would also meet the principles of natural justice.

“This court upheld the Telangana high court judgment in March and the high court judgment said hearing would mean personal hearing. Since the Supreme Court judgment does not mention anything about the nature of the hearing, every high court will interpret it in its own way," Mehta said.

At this point, senior advocate Mukul Rohatgi, appearing for one of the borrowers involved in the matter, objected to Mehta’s contentions, arguing that declaration of an account as fraudulent is akin to blacklisting and therefore, there cannot be a principle cast in stone that nobody will ever be given a personal hearing.The bench, after hearing both the senior counsels, proceeded to issue an order clarifying that the 2020 Telangana high court judgment has merged with the Supreme Court judgment on 27 March and the directives in the latter will prevail.

“The apprehension expressed by the S-G is that the Telangana high court judgment of 10 December, 2020, was upheld by this court. The judgement of this court may mean the grant of a personal hearing has to be given. We clarify that while upholding the high court judgement, the operative directions of this court are summarized in paragraph 81," stated the order.

On Mehta’s request for a clarification on the prospective nature of the court ruling, the bench said SBI should file a review petition and a mere application won’t be adequate. It recorded the S-G’s statement that a review petition will be filed by SBI.

Reading the principles of natural justice into the RBI’s directive and holding that such measures affect the right to reputation, the top court had in March held that an audience to a 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.

The court, at the time, was dealing with petitions pertaining to classification of a loan accounts as fraudulent, was interpreting a Master Circular titled ‘Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Direction 2016, which was later updated in June 2017 and 2021. Issued by the regulator under Section 35A of the Banking Regulation Act, it authorized banks to classify accounts as fraudulent without the need to hear the borrowers.

A group of borrowers argued that the consequence of the classification of an account as fraud had a severe impact on the fundamental right of the borrowers since such an action debar promoters and directors from accessing institutional finance, besides causing other stigma, akin to blacklisting the borrower.

RBI and the lender banks defended the circular, arguing that RBI is duly empowered to take pre-emptive measures in public interest to ensure that fraudulent borrowers are brought to justice and loss caused to the banks is mitigated.