Borrowers Must Be Heard Before Accounts Are Classified As Fraud, Says Supreme Court

The Supreme Court on Monday held that borrowers must be heard before their accounts are classified as ‘fraud’ by banks.

The apex court held that classifying an account as fraud is akin to blacklisting the borrowers for being unworthy of availing credit, which has both civil and penal consequences. Therefore, the top court said, an opportunity of to be heard must be provided before taking the action of classifying an account as fraudulent.

Additionally, the court also said that a reasoned order must be passed by the bank while classifying an account as fraud, to avoid any kind of arbitrary decision.

The principles of natural justice demand that the borrower must be served a notice and must be given an opportunity to explain the conclusions arrived at by the banks, the court said.

However, the court also clarified that the right to be heard will not accrue to the borrower prior to the registration of an FIR.

The case had reached the apex court after the State Bank of India appealed against the 2020 Telangana High Court judgment. The high court had held that an opportunity of hearing must be given to the borrower before taking any decision on the issue of whether the account should be classified as ‘fraud’ or not.