Bombay High Court stays operation of RBI master circular on bank fraud

The Bombay High Court on Monday stayed the effect of the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions of 2016 pertaining to bank frauds..A Division Bench of Justices GS Patel and Neela Gokhale stayed the effect of this circular till September 11, until it finally hears the petitions challenging the same..The circular permitted banks to make full use of the Central Fraud Registry for timely identification, control, reporting and mitigation of risks associated with fraud.The circular contained two provisions: Once a bank classifies an account as fraud, it is the responsibility of that bank to report the same to the Central Repository of Information on Large Credits platform to alert other banks. If a bank decides to straight away classify the account as a fraud, it is obligated to report the fraud to RBI within 21 days and report the case to any investigating agency..The petitioners claimed that borrowers had no opportunity of hearing before their accounts were classified as fraudulent as per the circular.In effect, the banks were neither giving hearing to the borrowers nor giving them copies of material relied upon before taking further precipitative action..The Court was informed that these actions had even been raised before the Supreme Court in appeal against an order of the Telangana High Court.The Supreme Court had upheld the order on March 27 this year.It held that a decision by a bank classifying a borrower's account as fraudulent must be a reasoned order and that such an order should be passed only after giving the borrower an opportunity of hearing. .State Bank of India informed the Bombay High Court that it had challenged the order before the apex court, however, it was yet to be heard. The High Court proposed to hear the petitions for final disposal on September 7 and 8. It admitted the petitions and directed all parties to file their replies. In the meantime, it ruled that the effect of the circulars would be stayed. The Bench clarified that where FIRs had been lodged and investigation was ongoing, the proceedings in those cases would proceed de hors the findings arrived at on the basis of the RBI's circulars.