The court established that borrowers must be given an opportunity to present their case before their accounts are classified as fraudulent as part of adhering to natural justice principles.

JUDGMENT :

VIJU ABRAHAM, J.

Petitioner has approached this Court essentially challenging Ext.P7 master directions on “frauds - classification and reporting by commercial banks and select FIs., 2016” issued by the Reserve Bank of India.

2. Petitioner is a company engaged in the business of gold, which includes the purchase of imported gold and export of gold ornaments manufactured by the petitioner from and out of the said imported gold so purchased by them. For the conduct of the said business financial facility was arranged by respondents 1 and 2. Petitioner would contend that respondent banks had decided to conduct forensic audit of the accounts of the petitioner since the account of the petitioner had become NPA. Pursuant to the same Ext.P4 notice was issued by the Forensic Auditor. Petitioner submitted Ext.P5 reply to the same. Petitioner submits that the Forensic Auditor has completed his report and the petitioner is apprehensive that the report cannot be conclusive in the light of the various issues which are pending adjudication before the High Courts. Petitioner would further submit that they are aggrieved by Clause 8.9.5 of Ext.P7 circular issued by the 3^rd respondent Reserve Bank of India, which is the master directions on frauds, wherein no provision has been provided for an opportunity of hearing to the borrowers before classifying the account as fraudulent. Clause 8.9.5 of Ext.P7 reads as follows:

“8.9.5 The forensic audit must be completed within a maximum period of three months from the date of the JLF meeting authorizing the audit. Within 15 days of the completion of the forensic audit, the JLF shall reconvene and decide on the status of the account, either by consensus or the majority rule as specified above. In case the decision is to classify the account as a fraud, the RFA status shall be changed to Fraud in all banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides, within 30 days of the RBI reporting, the bank commissioning/ initiating the forensic audit should lodge a complaint with the CBI on behalf of all banks in the consortium/MBA. For this purpose, if the bank initiating the forensic audit is a private sector bank, the complaint shall be lodged with the CBI by the PSU bank with the largest exposure to the account in the consortium/MBA. If there is no PSU bank in the consortium / MBA or it is a solo bank lending by a private sector bank/foreign bank, the private bank/foreign bank shall report to the Police as per extant instructions. This would be in addition to the complaint already lodged by the first bank which had detected the fraud and informed the consortium/MBA.”

Petitioner submits that going by Clause 8.11.1 of Ext.P7 the banks are required to lodge the complaint with the law enforcement agencies immediately on detection of the fraud and that no opportunity is provided to the borrowers like the petitioner in the said circular to represent before the bank before their accounts are classified as fraudulent and criminal action is initiated as per Clause 8.11.1 of Ext.P7. Petitioner would further submit that even third parties who has connection with the credit sanction, etc. were given opportunity of hearing as per Clauses 8.12.4 and 8.12.5 of Ext.P7 master circular before proceedings are initiated against them. Petitioner would submit that the said master circular was subject matter of challenge before the Apex Court in State Bank of India v. Rajesh Agarwal, 2023 KHC 6324 (Civil Appeal No.7301 of 2022 and connected cases). Civil Appeal No.7301 of 2022 was filed challenging the judgment dated 10.12.2020 of the Division Bench of the Telangana High Court, while considering Ext.P7 master circul