The Supreme Court recently held that borrowers are not entitled to a personal hearing before their loan accounts are classified as “fraud” under Reserve Bank of India (RBI) directions. [State Bank of India v. Amit Iron]

A Bench of Justices JB Pardiwala and KV Viswanathan 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 case reached the Supreme Court through multiple appeals involving State Bank of India (SBI) and other lenders against borrowers. The central conflict arose from the interpretation of the 2023 State Bank of India v. Rajesh Agarwal judgment.

In the 2023 judgment, Court had held that banks cannot classify a borrower’s account as “fraud” without first complying with principles of natural justice. It ruled that borrowers must be given notice, disclosure of material relied upon and an opportunity to be heard before such classification, since a fraud tag has serious civil and penal consequences, including blacklisting and reputational harm.

In the present case, SBI had classified the account as "fraud" in March 2024 after issuing a show-cause notice and receiving a reply, but without granting an oral hearing.

The Calcutta High Court had subsequently ruled in favour of the borrowers, interpreting the Rajesh Agarwal precedent to mean that a borrower must be allowed to represent their case in person before an adverse order is passed.

On appeal, the apex court clarified that the 2023 Rajesh Agarwal decision never actually mandated oral hearings. Instead, the Court held that the "opportunity of a hearing" is a flexible concept that is satisfied if the borrower can submit a written response.

The Bench observed that forcing an oral hearing in every case would paralyse banking operations:

"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."

It further noted that while courts of law require oral arguments, administrative bodies have the discretion to rely on written representations.

"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 delivered a strong mandate regarding transparency, ruling that banks must furnish the full Forensic Audit Report (FAR) to the borrower. The Court rejected the practice of only providing summaries or "conclusions" of these reports:

"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."

In conclusion, the Court held the following:

• No right to personal hearing

• RBI directions validated: The RBI’s 2024 Master Directions correctly interpret Rajesh Agarwal and prescribe the procedure.

• Natural justice satisfied: The framework of notice, reply and reasoned order is sufficient.

• Audit reports must be disclosed: Banks must furnish forensic audit reports, where relied upon for fraud classification. Borrowers must be given an opportunity to make representations on audit reports. Supplying audit reports in digital form constitutes valid compliance.

• Limited exception for third-party rights: Banks may redact portions of audit reports only where disclosure would affect third-party privacy, with reasons recorded.

• Natural justice applies even at red-flag stage: The obligation to ensure fairness continues through audit-based investigation under RBI directions.

The appellants were represented by Solicitor General Tushar Mehta with Advocates Chandrashekhar A Chakalabbi, SK Pandey, Awanish Kumar, Anshul Rai, Jatin Kumar, Rahul Singh Latwal, Sanjay Kapur, Surya Prakash, Shubhra Kapur, Abhishek Tiwari, Anuraj Mishra and Aman Mehta.

The respondents were represented by Senior Advocate Parag P Tripathi with Advocates Nakul Mohta, Misha Rohatgi, Ayush Kashyap, Amulya Upadhyay, Aparajito Sen and Rini Mehra.

Other respondents were represented by Senior Advocate K Parameshwar with Advocates Rajat Nair, Suryaksh Manot, Randeep Sachdeva, Shivang Gupta, Dhruv Pande, Akshaja Singh, Alok Dubey, Veda Singh, Prasad Hegde, N Sai Kaushal and Pallav Pal.

The RBI was represented by Senior Advocate Venkatesh Dhond with Advocates Ramesh Babu MR, Nisha Sharma, Prasad Shenoy and Rohan Kelkar.

The intervenor were represented by Advocates Purti Gupta, Henna George, Sunidhi Sah and Pooja.

[Read Judgment]