Banks Must Give Opportunity Of Hearing To Borrowers Before Classifying Their Accounts As Fraud : Supreme Court

 The decision to classify an account as fraud must be made by a reasoned order.

In a significant verdict, the Supreme Court on Monday held that borrowers must be heard before their accounts are classified as fraud. The Court held that the principles of "audi alteram 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 noted that classification of accounts as fraud results in serious criminal and civil consequences for borrowers; it amounts to "blacklisting" of borrowers; hence opportunity of hearing must be granted for the borrowers under the Master Directions on Fraud.

Also, such decision must be made by a reasoned order. It cannot be presumed that the Master Circular excludes the principles of natural justice. A bench comprising Chief Justice of India DY Chandrachud and Justice Hima Kohli upheld the judgment passed by the Telangana High Court in December 202

Apart from the principle of "audi alteram partem", the Court held that the requirement of passing a reasoned order must be read into the Master circular as it will act as a "check on the arbitrary exercise of powers". "The reasons to recorded need not be placed on the same pedestal as a judgment of th