Classification Of A Borrower’s Account As Fraudulent

Classification as "fraud" under RBI regulations causes "civil death" for borrowers, debarring them from institutional finance for five years. In Rajesh Agarwal, the Supreme Court ruled that natural justice must apply, leading to the 2024 Master Directions. Banks must now issue a show-cause notice, disclose the forensic audit report, and pass a reasoned order. Crucially, while a written representation is mandatory, a personal hearing is not required. These procedures balance fairness with administrative efficiency but do not preclude separate criminal proceedings via FIRs.

INTRODUCTION

The classification of a borrower’s account as “fraud” under the Reserve Bank of India’s regulatory framework has serious implications. The borrower and its promoters and directors are debarred from accessing institutional finance for five years, reported to law enforcement agencies, and effectively branded as untrustworthy by the entire banking system. The Supreme Court, in Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105, has succinctly termed this as the “civil death” of the concerned borrower.

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