The Supreme Court ruled that borrowers are not entitled to a personal oral hearing before their loan accounts are classified as fraud under the Reserve Bank of India’s directions. It held written submissions and safeguards meet legal requirements.
The Supreme Court ruled that borrowers do not have a right to a personal (oral) hearing before their loan accounts are designated as fraud under Reserve Bank of India (RBI) directions.
A Bench of Justices JB Pardiwala and KV Viswanathan heard the matter.
The court held,
“Rajesh Agarwal (supra) did not recognize any right in the borrower to a personal hearing by the banks before classifying their account as a fraud account.”
The matter reached the Supreme Court through multiple appeals, including ones filed by State Bank of India (SBI) and other lenders against various borrowers. At issue was how to interpret the Court’s 2023 decision in State Bank of India v. Rajesh Agarwal.
Rajesh Agarwal (2023) had required banks to follow principles of natural justice before labeling an account as “fraud.”
The 2023 judgment said borrowers must receive notice, disclosure of the material relied upon, and an opportunity to be heard before a fraud classification is imposed, because the “fraud” tag carries serious civil and criminal consequences, such as blacklisting and reputational damage.
SBI classified an account as “fraud” in March 2024 after serving a show-cause notice and receiving a written reply but without holding an oral hearing. The Calcutta High Court favored the borrowers, reading Rajesh Agarwal to require an in-person opportunity to be heard before any adverse order.
On appeal, the Supreme Court held that Rajesh Agarwal did not mandate oral hearings. The Court explained that the “opportunity of a hearing” is a flexible concept and may be satisfied by written representations.
Requiring an oral hearing in every case, the Court observed, would obstruct the administrative process,
“Oral hearing is bound to convert an administrative process which was intended to be swift, into a protracted one, defeating the very purpose of the exercise.”
The Court further distinguished judicial practice from administrative procedure, noting that while courts habitually hear oral arguments, administrative authorities can legitimately rely on written submissions,
“The process of a show cause notice with the supply of the evidentiary material, consideration of the representation and the mandate to pass a reasoned order are more than adequate safeguards.”
However, the Court stressed strong transparency requirements. When a forensic audit report (FAR) is relied upon for fraud classification, the bank must provide the complete report to the borrower summaries or conclusions alone are insufficient,
“The furnishing of findings and conclusion alone would not tantamount to compliance with the principles of natural justice. The reasons for the findings and conclusion will be in the body of the report and a complete sense of the findings and conclusions can be made only after reading to the contents of the report.”
Key holdings summarized
- No entitlement to a personal/oral hearing before fraud classification.
- RBI’s 2024 Master Directions correctly interpret Rajesh Agarwal and were upheld.
- Principles of natural justice are satisfied by serving notice, providing material relied upon, allowing a written reply, and passing a reasoned order.
- Full forensic audit reports must be furnished to borrowers when relied upon; borrowers must be permitted to make representations on the report. Digital delivery of the audit report suffices.
- Redaction is allowed only to protect legitimate third‑party privacy interests, and any redaction must be reasoned and recorded.
- The duty to observe natural justice continues during the red-flag and audit stages under RBI directions.
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Solicitor General Tushar Mehta, with Chandrashekhar A. Chakalabbi, S.K. Pandey, Awanish Kumar, Anshul Rai, Jatin Kumar, Rahul Singh Latwal, Sanjay Kapur, Surya Prakash, Shubhra Kapur, Abhishek Tiwari, Anuraj Mishra and Aman Mehta appeared for the appellants.
Senior Advocate Parag P. Tripathi, with Nakul Mohta, Misha Rohatgi, Ayush Kashyap, Amulya Upadhyay, Aparajito Sen and Rini Mehra appeared For the respondents
Senior Advocate Venkatesh Dhond, with Ramesh Babu M.R., Nisha Sharma, Prasad Shenoy and Rohan Kelkar. presented RBI.
Case Title: State Bank of India v. Amit Iron