Bombay HC stays RBI Circular allowing Banks to classify accounts as Fraud
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The division bench of justice Gautam Patel and justice Neela Gokhale was hearing a clutch of petitions, including those filed by Naresh Goyal, the promoter of now defunct Jet Airways, and his wife Anita Goyal among others, contending that the master circular authorised banks to arbitrarily classify accounts in their names as a fraud account without giving them an opportunity to have a say or provide them with copies of material relied upon to reach the decision.
The circular permitted banks to make full use of the Central Fraud Registry for timely identification, control, reporting, and mitigation of risks associated with the fraud. The circular contains two provisions - for banks to classify an account as fraud and report it to the Central Repository of Information on Large Credits platform to alert other banks and if a bank decides to straightaway classify the account as fraud. It also obligated banks to report the fraud to RBI within 21 days and to investigating agencies concerned.
The petitioners submitted that the authority granted by the circular to the banks was against the principles of natural justice, as it did not afford the account holders an opportunity to defend themselves against the action/decision of the bank.
The court was further informed that the Supreme Court on March 27, 2023, had upheld the order of Telangana high court which passed an order in petitions challenging the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. The Telangana HC order had stated that the principles of natural justice must be read into the provision of the Master Directions on Frauds.
The bench was told that the SC order stated that a decision by a bank classifying a borrower’s account as fraudulent must be a reasoned order and such an order should be passed only after giving the borrower an opportunity of hearing.
The counsel for the State Bank of India informed the bench that it had challenged the order in SC, however, it was yet to be heard after which justice Patel proposed to hear the petitions for final disposal on September 7 and 8 and stayed the effect of the RBI master circular till September 11. The bench also directed all parties to file their replies to the petition.
The bench, however, clarified that where FIR had been lodged and investigation was ongoing, the proceedings in those cases would proceed without alluding to the findings arrived at based on the fraud circular.
The circular permitted banks to make full use of the Central Fraud Registry for timely identification, control, reporting, and mitigation of risks associated with the fraud. The circular contains two provisions - for banks to classify an account as fraud and report it to the Central Repository of Information on Large Credits platform to alert other banks and if a bank decides to straightaway classify the account as fraud. It also obligated banks to report the fraud to RBI within 21 days and to investigating agencies concerned.
The petitioners submitted that the authority granted by the circular to the banks was against the principles of natural justice, as it did not afford the account holders an opportunity to defend themselves against the action/decision of the bank.
The court was further informed that the Supreme Court on March 27, 2023, had upheld the order of Telangana high court which passed an order in petitions challenging the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016. The Telangana HC order had stated that the principles of natural justice must be read into the provision of the Master Directions on Frauds.
The bench was told that the SC order stated that a decision by a bank classifying a borrower’s account as fraudulent must be a reasoned order and such an order should be passed only after giving the borrower an opportunity of hearing.
The counsel for the State Bank of India informed the bench that it had challenged the order in SC, however, it was yet to be heard after which justice Patel proposed to hear the petitions for final disposal on September 7 and 8 and stayed the effect of the RBI master circular till September 11. The bench also directed all parties to file their replies to the petition.
The bench, however, clarified that where FIR had been lodged and investigation was ongoing, the proceedings in those cases would proceed without alluding to the findings arrived at based on the fraud circular.
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