The Supreme Court on Tuesday asked why banks were opposing personal hearings for borrowers before classifying their accounts as fraud, noting that such a step would not prejudice the banks’ interests.
A bench of Justices J.B. Pardiwala and K.V. Viswanathan posed the question while hearing a petition filed by the State Bank of India (SBI) challenging a Calcutta High Court order in a case concerning the declaration of a borrower’s account as fraudulent.
“Just make us understand what is the problem in giving him a personal oral hearing. And if given, it would cause what prejudice to the concerned bank?” the bench asked.
The court observed that since its March 2023 judgment, which mandated that borrowers be given a reasonable opportunity to respond before their accounts are declared fraudulent, more than two years had passed and several banks must have already been following this process.
“Why does the State Bank of India have some problem with giving a personal hearing or oral hearing?” the bench asked, pressing the country’s largest bank to explain its resistance.
Solicitor General Tushar Mehta, appearing for SBI, argued that the 2023 ruling should not be read as requiring a mandatory oral or personal hearing. He said that banks already follow due process through forensic audits where the account holder participates, followed by a written notice and opportunity to submit a reply.
He added that giving personal hearings in every case may be impractical and could even “defeat the very purpose” of declaring an account as fraudulent. “No bank gives personal hearing,” Mehta said, urging the court to also hear the Reserve Bank of India (RBI) on the issue.
The bench, however, noted that the core of the issue lay in fairness and transparency. It directed the parties to file written submissions, including citations of case law they intended to rely on.
“We also want the bank to highlight the peculiar contingencies which they may have to encounter and why such contingencies should exempt the bank from giving personal hearing,” the court said.
It also directed SBI to implead the RBI as a party, observing that the regulator’s presence was necessary, and fixed the next hearing for November 18.
In its 2023 verdict, the Supreme Court had held that the principles of natural justice required banks to provide borrowers with notice, access to the forensic audit report, and a fair opportunity to respond before their accounts are classified as fraud.
“Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud,” the apex court had then observed.
The 2023 judgment arose from challenges to the RBI’s Frauds Classification and Reporting by Commercial Banks and Select FIs Directions, 2016, which several high courts had questioned on the ground that they did not ensure borrowers a chance to be heard.
The Supreme Court had upheld the RBI’s framework but clarified that banks must comply with basic procedural fairness before branding any borrower a fraudster — a direction now under renewed scrutiny as SBI contests the extent of that requirement.
