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Borrowers Have A Right To Be Heard Before Declaration Of Bank Account As Fraud: Supreme Court

In the absence of such a hearing, it is equivalent to "blacklisting" a borrower from availing any credit facilities in the future, the apex court noted. 

The Supreme Court on Monday said a borrower must be accorded a hearing before an account is classified as "fraud" and a reasoned order must follow if such an action is taken. The top court was hearing a bunch of petitions that challenged a 2016 circular issued by the Reserve Bank of India (RBI) which allowed banks to deem accounts of wilful defaulters as fraudulent in a unilateral manner. 

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A Supreme Court bench headed by Chief Justice D Y Chandrachud, while upholding a Telangana High Court verdict from 2020, said that a classification of accounts as fraud results in civil and criminal consequences for borrowers and hence, an opportunity of hearing must be granted to such persons under the Master Directions on Fraud.  

"Opportunity of hearing must be given by the banks to the borrowers before classifying their accounts as fraud under the Master Directions on fraud," the bench said.  

In the absence of such a hearing, it is equivalent to "blacklisting" a borrower from availing any credit facilities in the future, the apex court noted. 

The Telangana High Court verdict dated December 10, 2020 had similarly ruled for RBI to ensure that principles of natural justice be read into the clauses in the master circular issued by the central bank. The high court stated back then that natural justice would allow for everyone to have a hearing before a decision was passed against them. 

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This decision was subsequently challenged in the Supreme Court by RBI and State Bank of India (SBI) on the grounds that providing an opportunity of hearing to the borrower before reporting fraud could defeat the entire point of 2016 circular, which is to detect fraud at the earliest.

With PTI inputs

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