Not your right to be heard

On April 7, 2026, a Division Bench of the Supreme Court of India has authoritatively settled the contours of natural justice applicable to the classification of bank accounts as fraud under the RBI’s framework for fraud classification. (“RBI Master Directions”). The judgment clears the uncertainty caused by divergent High Court rulings on whether borrowers are entitled to a personal hearing or copies of entire forensic audit reports. For banks, the ruling offers much needed clarity on process and timelines. For borrowers, it confirms that the real safeguard lies in access to the evidentiary record being made available.

The divergent rulings by High Courts resulted in confusion due to varied interpretations of State Bank of India vs Rajesh Agarwal. The RBI Master Directions neither provided an explicit right to a personal hearing nor explicitly mandated furnishing copies of the entire forensic audit report to the borrowers. The Supreme Court examined Rajesh Agarwal (supra) in detail and rejected the interpretation adopted by the Delhi and Calcutta High Courts which held that borrowers are entitled to a personal hearing  during the process of classifying their account as fraud.

The new ruling further conclusively held that a borrower is entitled to the entire forensic audit report, barring few instances of limited redactions in genuinely exceptional cases (such as where disclosure would unjustifiably compromise third-party privacy, reveal confidential information of other borrowers or counterparties, or prejudice an ongoing investigation). However, the judgment makes it equally clear that such redactions cannot be routine or sweeping. In effect, redaction is the exception and full disclosure is the rule.

By rejecting the view that Rajesh Agarwal (supra) created a freestanding right to a personal or oral hearing, the Supreme Court has endorsed a written-hearing model, anchored in a detailed show cause notice, disclosure of the material relied upon, an opportunity to submit a written representation and a speaking order that addresses the borrower’s submissions. The insistence on this sequence effectively converts what was previously seen as a mere internal bank process into a structured administrative decision that can be tested, without importing the full trappings of an adjudicatory proceeding.

The ruling strikes an appropriate balance between the rights of the borrowers and the statutory obligations of the bank. By insisting that the forensic audit report relied upon for fraud classification must be furnished to the borrower, the Supreme Court has recognised that the right to respond is meaningful only if the borrower has reviewed the evidentiary foundation of the decision. Additionally, requiring disclosure of forensic audit reports will inevitably demand higher quality and thoroughly-reasoned audit outputs. Banks can no longer rely on broad or vague findings immune from scrutiny. This will result in greater care in commissioning audits, framing reference terms, and ensuring procedural safeguards even at the audit stage, particularly where third party consultants are involved.

The ruling also draws a critical distinction, albeit not expressly, between fraud classification as a regulatory trigger and as a matter of criminal prosecution. With the ruling, Supreme Court has acknowledged the administrative nature of fraud classification and ensured that regulatory action does not lead to penal consequence without adequate safeguards. From a litigation perspective, the ruling narrows the scope for procedural challenges and is likely to influence any challenge based solely on absence of personal hearing. Borrowers will now have to demonstrate substantive prejudice, typically arising from non-disclosure, selective reliance on material, or arbitrary reasoning. Conversely, banks that fail to disclose forensic reports, or attempt excessive redaction without justification, remain vulnerable to judicial interference. Challenges are therefore likely to shift from the right to be heard to the sufficiency and transparency of the material relied upon as well as the underlying reasoning behind fraud classification.

About the authors: Hormuz Mehta is a Partner, Ahsan Allana is a Principal Associate and Kunal Bilaney is an Associate at JSA Advocates and Solicitors.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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