RBI to come up with new rules on classification of accounts as fraudulent

The Reserve Bank of India (RBI) will soon develop a set of rules that will govern the declaration of a bank account as fraudulent, a report by The Economic Times (ET) said. This comes nearly a month after the Supreme Court asked banks to hear the borrower before declaring their account as fraudulent.

“Banks led by State Bank of India (SBI) are keen to put out their views to the apex court as to why a personal hearing in all these cases is not practical, but the RBI does not want to drag on the case in the Supreme Court and is preparing a new updated notification clarifying all the points raised in the court,” a person aware of the matter was quoted as saying in the ET report.

According to the report, the new rules will give the borrower a personal hearing before they are declared a wilful defaulter.

The RBI will come up with a new notification in a few weeks. The norms will standardise the process of declaring a fraudulent account and will align with the wilful defaulter norms. The central bank had come up with a circular in 2015 on wilful default. It stated that the power to declare any account as a “wilful defaulter” lies entirely in the hands of the bank.

On March 27, a Supreme Court bench comprising chief justice of India (CJI) DY Chandrachud and Justice Hima Kohli said that banks must hear the borrowers before classifying their accounts as fraud. They said that classifying accounts as fraud results in serious civil consequences for the borrowers, including “blacklisting” of the accounts.

The apex court upheld a judgement passed by the Telangana High Court in December 2020 stating that the principles of “audi alteram partem” must be applied before declaring a party as “a fraudulent borrower” or “a holder of fraudulent account”.

“Audi alteram partem” means “hear the other side” or “no man should be unheard, both the parties have an opportunity of being heard”.

“Declaration of fraud entails penal and civil consequences, amounts to blacklisting from accessing institutional finance…Bank order must show reasons behind the declaration of fraud, reasons will keep banks from exercising powers arbitrarily,” the court said.

The borrowers had argued that the circular violates principles of natural justice and said that it “hurt the ability to raise fresh credit after declaration”.

Banks, however, reportedly want a middle path which will not hamper the recovery process while incorporating SC’s observations.