The Supreme Court ruled that classification of borrower accounts as 'fraud' requires adherence to natural justice, including notice, opportunity to respond, and access to forensic reports but does not grant an automatic right to personal hearings.

JUDGMENT :

K.V. Viswanathan, J.

1. Six decades ago, it was aptly proclaimed that principles of natural justice cannot be cut and dried or nicely weighed and measured (Ridge vs. Baldwin, 1964 AC 40). This Court rightly described it as a flexible concept, to be adapted to circumstances. Its elasticity, however, has been tested to its limits in several cases. We are here confronted with one such. While the Reserve Bank of India (for short “RBI”) and the appellant-Banks contend that a notice, an opportunity to reply, and a reasoned order should serve the ends of justice, the borrowers implore that they are entitled to a “personal hearing” before classifying their account as a “fraud account.” The other issue that arises is the “borrowers” entitlement to the Forensic Audit Reports.

2. Leave granted.

3. The core issue that arises in the case revolves around the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 (hereinafter referred to as the “Master Directions-2016”) and the Reserve Bank of India (Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions Directions, 2024 (hereinafter referred to as the “Master Directions-2024”).

4. When the matter came up on 04.11.2025, this Court directed the impleadment of RBI as a party-respondent in the matter in Civil Appeal arising out of SLP(C) Nos. 20618-20619/2025. The RBI has been duly impleaded and also been heard in the matter.

5. The respondent-borrowers herein contend that the issues are no longer res integra since the matter has been concluded by the judgment of this Court dated 27.03.2023 in State Bank of India and Others vs. Rajesh Agarwal and Others , (2023) 6 SCC 1. The appellant-Banks as well as the impleaded respondent - RBI submit to the contra.

FACTS IN CIVIL APPEAL ARISING OUT OF SLP(C) NOS.20618-20619/2025:-

6. On 20.08.2019, the loan account of respondent No.1 was classified as a Non-Performing Asset (NPA) by the appellant-State Bank of India on account of defaults in repayment obligations. On 27.12.2023, the appellant-Bank issued a show cause notice to the respondents alleging various acts of non-compliance with the agreed terms of the loan documents, commission of irregularities in financial conduct suggesting fraudulent activity. The respondents were asked to show cause as to why the account should not be categorized and reported as “fraud” (as per the RBI guidelines). On 08.02.2024, respondent Nos.1 and 2 submitted replies and denied any breach of the terms and conditions of the loan agreement. On 13.03.2024, the appellant-Bank communicated to the respondents that the loan account has been classified as “fraud” and a speaking order passed in this regard was communicated.

7. The respondents filed a Writ Petition before the High Court at Calcutta. By a judgment dated 07.08.2024, a learned Single Judge interpreted the judgment of this Court in Rajesh Agarwal (supra) to mean that the borrower should be given an opportunity to explain in person and further that the Forensic Audit Report should be supplied to the borrower. The Court held that the borrower should be allowed to represent his case before the authority, by way of a personal hearing and, thereafter, the order ought to have been passed. The Writ Petition was allowed in the above terms. The appellant-Bank carried the matter in appeal to the Division Bench. The Division Bench, by its judgment dated 12.03.2025 dismissed the appeal and did not in