SBI asks SC for clarity on loan fraud label

Upholding the Telangana high court’s ruling, the high court ruled that banks must listen to a borrower before classifying an account as fraudulent. Due to the serious civil legal consequences for the borrower of classifying an account as fraudulent, the instructions must be interpreted reasonably, applying the principles of natural fairness, the SC noted.

The move was to include additional security measures for state-owned banks.

The SBI sought to limit the scope of “face-to-face hearings” by urging the court to allow banks to provide borrowers with only relevant excerpts from due diligence reports instead of full reports.

According to the SBI, allowing the borrower to make a statement based on relevant extracts from the audit report would be the only practical and feasible way to comply with the principles of natural justice.

In addition, SBI argued in a statement that banks should not be required to provide a full due diligence report to a borrower, as this could hinder future investigations and alert the borrower.

“Disclosing all the material against the borrower at this stage will give the borrower the opportunity to drag out the investigation, destroy the evidence and hide from the country, especially since the conclusion of the forensic examination, on the basis of which the decision is made, is prepared on the basis of documents provided by the borrowers themselves, and in the course of the forensic examination borrowers are involved. Therefore, the provision of relevant excerpts from the conclusion of the forensic medical examination will serve the purposes of justice, ”it is argued.

In addition, banks should be allowed to determine the timing of the case depending on the urgency of the case.

The SBI’s statement is not intended to revise the March SC ruling, but requires clarification, given the concern that the decision was misinterpreted or applied without clarification.

The legal dispute followed a 2016 Reserve Bank of India circular on fraud classification and reporting by commercial banks and financial institutions, which was challenged in various high courts. The RBI has asked banks to be wary of large loan defaulters, and said banks should declare such accounts fraudulent if found suspicious.

The RBI and SBI are of the opinion that the rules should not be changed to ensure early detection of fraud. The Supreme Court believes that this decision is tantamount to blacklisting borrowers and depriving them of access to institutional financing.