1. Banks classified loan accounts as fraud based on forensic audit findings without providing personal hearings, invoking regulatory directions concerning fraud risk management in commercial banking. (Para 1 , 6 , 8 , 9 )
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2026 Supreme(SC) 349
SUPREME COURT OF INDIA
J.B. PARDIWALA, K.V. VISWANATHAN, JJ.
State Bank of India – Appellant
Versus
Amit Iron Private Limited & Ors. – Respondents
Civil Appeal Nos. 4243-4244 of 2026 (@ Special Leave Petition (C) Nos. 20618-20619 of 2025) With Civil Appeal No.4245 of 2026 (@ Special Leave Petition (C) 38805 of 2025) (@ Diary No. 55628 of 2025)
Decided On : 07-04-2026
Important Points
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.
Subject
Banking and Finance - Fraud Classification
Act Referred
Headnote
(A) Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 and 2024 - Natural justice - Personal hearing requirement - Bank classified borrower accounts as 'fraud' without personal hearings - Supreme Court examined principles of natural justice and concluded that due process is satisfied by providing notice, time to respond, and reasoned orders. Borrowers must have access to forensic audit reports before being classified as fraudulent. (Paras 11, 81, 98.6)
(B) Jurisdiction and Regulatory Authority - RBI as regulatory body - It is within RBI's discretion to manage fraud classifications and ensure compliance with natural justice principles. No automatic right to personal hearing established. (Paras 101, 126)
(C) Procedural Fairness - Notification of findings and opportunity for representation prior to classification upheld, reinforcing the concept of fair adjudication in bank proceedings. (Paras 98.6, 96)
(B) Jurisdiction and Regulatory Authority - RBI as regulatory body - It is within RBI's discretion to manage fraud classifications and ensure compliance with natural justice principles. No automatic right to personal hearing established. (Paras 101, 126)
(C) Procedural Fairness - Notification of findings and opportunity for representation prior to classification upheld, reinforcing the concept of fair adjudication in bank proceedings. (Paras 98.6, 96)
Judgement Key Points
Key Points: - (!) (!) - (!) (!) - (!) (!)
What is the scope of natural justice required before classifying an account as "fraud" under RBI Master Directions 2016/2024?
What is the duty to disclose forensic audit reports to borrowers before classification as fraud, and what form of hearing or representation is required?
What are the regulatory distinctions between "fraud" and "willful default" classifications in terms of procedural fairness and disclosure obligations?
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. Tushar Mehta, Solicitor General Mr. Chandrashekhar A. Chakalabbi, AOR Mr. Jatin Kumar, Adv. Mr. Anshul Rai, Adv. Mr. S.k Pandey, Adv. Ms. G. Anusha, Adv. Mr. Varnik Kundaliya, Adv. Mr. Rahul Singh Latwal, Adv. Mr. Tushar Mehta, Solicitor General Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Shubhra Kapur, Adv. Ms. Santha Smruthi, Adv. Mr. Aman Mehta, Adv. Mr. Anuraj Mishra, Adv.
For the Respondent(s): Mr. Nakul Mohta, Adv. Ms. Misha Rohatgi, AOR Mr. Ayush Kashyap, Adv. Mr. Rajat Nair, AOR Mr. K. Parameshwara, Adv. Mr. Suryakash Manot, Adv. Mr. Randeep Sachadeva, Adv. Mr. Vishal Sinha, Adv. Mr. Dhruv Pande, Adv. Mr. Akshaja Singh, Adv. Mr. Shivang Gupta, Adv. Mr. Prashant Sodhi, Adv. Mr. Mukund Sharma, Adv. Mr. Alok Dubey, Adv. Ms. Veda Singh, Adv. Mr. Ramesh Babu M. R., AOR Ms. Manisha Singh, Adv. Ms. Nisha Sharma, Adv. Ms. Jagriti Bharti, Adv. Ms. Rohan Srivastava, Adv. Ms. Tanya Chowdhary, Adv. Ms. Purti Gupta, AOR Ms. Purti Gupta, Adv. Ms. Henna George, Adv.
For the Petitioner(s): Mr. Tushar Mehta, Solicitor General Mr. Chandrashekhar A. Chakalabbi, AOR Mr. Jatin Kumar, Adv. Mr. Anshul Rai, Adv. Mr. S.k Pandey, Adv. Ms. G. Anusha, Adv. Mr. Varnik Kundaliya, Adv. Mr. Rahul Singh Latwal, Adv. Mr. Tushar Mehta, Solicitor General Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Shubhra Kapur, Adv. Ms. Santha Smruthi, Adv. Mr. Aman Mehta, Adv. Mr. Anuraj Mishra, Adv.
For the Respondent(s): Mr. Nakul Mohta, Adv. Ms. Misha Rohatgi, AOR Mr. Ayush Kashyap, Adv. Mr. Rajat Nair, AOR Mr. K. Parameshwara, Adv. Mr. Suryakash Manot, Adv. Mr. Randeep Sachadeva, Adv. Mr. Vishal Sinha, Adv. Mr. Dhruv Pande, Adv. Mr. Akshaja Singh, Adv. Mr. Shivang Gupta, Adv. Mr. Prashant Sodhi, Adv. Mr. Mukund Sharma, Adv. Mr. Alok Dubey, Adv. Ms. Veda Singh, Adv. Mr. Ramesh Babu M. R., AOR Ms. Manisha Singh, Adv. Ms. Nisha Sharma, Adv. Ms. Jagriti Bharti, Adv. Ms. Rohan Srivastava, Adv. Ms. Tanya Chowdhary, Adv. Ms. Purti Gupta, AOR Ms. Purti Gupta, Adv. Ms. Henna George, Adv.
Table of Contents
2. Borrowers contend that natural justice mandates a personal hearing and disclosure of forensic audit reports, while banks argue that administrative efficiency and regulatory objectives preclude personal hearings. (Para 26 , 28 , 30 , 32 , 44 , 48 , 51 , 54 )
3. Natural justice requires fairness through show cause notices, replies, and reasoned orders, but it is a flexible concept that does not necessitate an oral personal hearing before administrative bodies. (Para 76 , 78 , 83 , 93 , 96 , 125 )
4. The requirement of audi alteram partem is satisfied by show cause notices, written responses, and reasoned orders; and mandatory disclosure of forensic audit reports is essential for procedural fairness. (Para 101 , 118 , 121 , 126 )
5. The Court upheld the obligation for banks to provide forensic audit reports to borrowers but ruled that no absolute right to a personal hearing exists in fraud classification proceedings. (Para 127 , 128 )
6. Does the classification of an account as a fraud account under RBI Master Directions confer a right to a personal hearing?
No. The principles of natural justice do not imply an automatic right to a personal oral hearing in administrative fraud classification proceedings. The requirement is satisfied by the issuance of a show cause notice, consideration of a written reply, and the passing of a speaking, reasoned order based on objective evidence. (Para 74 , 79 , 82 , 92 , 93 , 126 )
7. Is the disclosure of a forensic audit report to the borrower mandatory before an account is classified as fraud?
Yes. Principles of natural justice demand the disclosure of relevant evidentiary material, specifically the forensic audit report, to the borrower. This enables the borrower to effectively respond to the charges, except in exceptional cases where disclosure may impinge upon third-party privacy or protected sensitive data, which must be justified by the bank. (Para 110 , 118 , 121 , 124 , 126 )
8. How should an authority manage the disclosure of material if parts of a forensic audit report involve third-party privacy?
The bank should disclose the relevant parts of the audit report that bear on the action proposed. It may redact sections impinging on third-party privacy or strategic confidential information, provided these reasons are recorded and justified. The onus is on the bank to establish that withholding specific segments is necessary to protect third-party rights. (Para 120 , 122 , 123 )
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 interfere with the directions of the learned Single Judge. Aggrieved, the appellant-Bank is before us.
FACTS IN CIVIL APPEAL ARISING OUT OF SLP(C) NO.38805/2025:-
8. On 27.03.2012, the appellant-Bank of India classified the account of M/s Liliput Kidswear Limited, of which the respondent No.1 was the representative/promoter, as a Non-Performing Asset under the prudential norms of the RBI. Thereafter, the first forensic audit was carried out. On 18.08.2023, a show cause not
