A bank may classify borrowers as 'fraud' even after settlement of debts under an OTS, based on RBI Directions safeguarding public interest and financial integrity.

JUDGMENT : 

AMRITA SINHA, J.

1. The petitioners are aggrieved by the act of Axis Bank in continuing to classify the petitioner no. 1 as fraud despite repayment of the due amount. According to the petitioner, a sum of Rs. 7,50,00,000/- was sanctioned as cash credit facility by the bank. The petitioners, prior to declaration of fraud, repaid a sum of Rs. 13,47,96,742/-. The bank claims Rs. 2,40,81,903.25/- over and above the amount paid by the petitioners.

2. An agreement for One Time Settlement (OTS) was entered into by and between the petitioners and the bank and in terms of the OTS, the petitioner paid Rs. 2,30,00,000/- and the said amount has been accepted by the bank. Despite receiving the amount as settled by and between the parties, the bank still continues to classify the petitioner no. 1 as fraud. The petitioners are aggrieved by the same.

3. It has been submitted that as the amount due to the bank had already been repaid by the petitioners in terms of the OTS, the bank ought to remove the name of the petitioner no. 1 from the list of fraud.

4. It has been argued that after settlement of the issue no further relationship between the petitioners and the bank exists and no purpose will be served in continuing to mark the petitioner no. 1 as fraud. The bank ought to remove the name of the petitioner no.1 from the list of borrowers who had committed fraud.

5. It has been pointed out that the agreement for OTS clearly mentions that the bank agrees and undertakes to withdraw the several suits filed before the respective courts. The bank has also agreed that the suits of the account will be shown as ‘settled’. After settlement of the account, the bank ought not to continue with the classification of fraud in respect of the petitioners.

6. Prayer has been made to set aside the enlistment of the petitioners as fraud in the records of the bank.

7. The learned advocate for the petitioners relies upon the following Supreme Court decisions in support of his submission:

(i) Suresh C. Singal & Ors. vs. State of Gujrat & Ors. reported in 2025 SCC Online SC 788.

(ii) N.S. Gnaneshwaran Etc. vs. Inspector of Police & Anr. reported in 2025 SCC Online SC 1257.

8. Learned advocate representing the respondent bank has filed an affidavit opposing the prayer of the petitioners.

9. Reference has been made to the Reserve Bank of India (Fraud Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016. The Direction relating to the penal measures to be taken for fraudulent borrowers mentions that borrowers who have defaulted and have also committed fraud in the account would be debarred from availing bank finances from Schedule Commercial Banks, Development Financial Institutions, Government owned NBFCs Investment Institutions, etc. for a period of five years from the date of full payment of the defrauded amount.

10. The Directions also mention that no compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued. The aforesaid Directions have been framed by the Reserve Bank of India in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949 in public interest. The purpose for putting into place such Directions are, inter alia, for providing a framework to the banks to enable them to detect and report frauds early and to do effective fraud risk management. The guidelines lay down necessary safeguards/ preventive measures by way of appropriate procedures and internal checks.

11. The petitioner no.1 was declared fraud as adverse findings were reported in internal investigation and forensic audit regarding misrepresentation in such statements submitted to the bank. The bank admits that money had bee