Banks should give reasoned order: SC on fraudulent accounts

The Supreme Court on Monday held that a decision classifying the account of a borrower as fraudulent must be a reasoned order.

Such an order must be passed only after giving the borrower an opportunity of hearing, a Bench comprising Chief Justice of India, D Y Chandrachud and Justice Hima Kohli said.

The court held that the principles of "audi alterm partem" must be read into the circular issued by the Reserve Bank of India on the classification of bank accounts as fraud accounts.

The Bench headed by CJI Chandrachud passed the order while upholding a judgment delivered by the Telangana High Court.

"Decision classifying borrower account as fraudulent must be with reasoned order. Rule of adi alteram partem has to be read into it and hearing is required before borrower accounts are barred," the court said.

Further the Supreme Court said that debarring borrowers from accessing institutional finances cause severe impact on them.

It is akin to blacklisting which impacts the credit score.

"The principle of 'audi alteram partem' be read into the RBI Master Circular on Fraudulent accounts," the Bench ruled.

The court concluded by saying that an opportunity must be given by the banks to the borrowers before classifying their accounts as fraud under the Master Directions on Fraud.

Such decisions must be made by a reasoned order. It cannot be presumed that the Master Circular excludes the principles of natural justice, the Bench headed by CJI Chandrachud also said.

The court however said that no opportunity of being heard was needed before the registration of a First Information Report (FIR).

The Bench upheld the judgment of the Telangana High Court which had taken the same position. The Supreme Court however set aside a verdict of the Gujarat High Court, which had ruled in the contrary.

"Principles of audi alteram partem, howsoever short, have to be applied before declaring a party as 'a fraudulent borrower', or as 'a holder of fraudulent account, the Telangana High Court had held.