New Delhi: The Bombay high court on Monday, June 19, asked banks to follow the Supreme Court's order on the Reserve Bank of India (RBI)'s 2016 master circular on the classification of 'fraud accounts' without a hearing.

According to the RBI circular, banks can declare any account as a fraud account without a hearing.

The high court was hearing a batch of petitions challenging the RBI circular, saying the decision was against the principle of natural justice and a hearing should be granted to account holders. Among the petitioners were Jet Airways founder Naresh Goyal and his wife Anita Goyal.

While some reports had initially said that the Bombay HC had stayed the effect of the RBI circular, the bench of Justices G.S. Patel and Neela Gokhale, the court's order said this was not the case.

"We have not stayed the operation of the Master Circular (which has not been struck down by the Supreme Court decision). The Supreme Court has only read certain requirements into the Master Circular. It follows, therefore, that actions under the Master Circular consistent with the Supreme Court judgment and decision may undoubtedly proceed," the high court clarified, according to Bar and Bench.

The court said its action is "restricted only to actions by the banks or their in-house committees under the Master Circular in question".

"We will take up the entire group for hearing and final disposal on 7th and 8th September 2023. The final hearing will begin immediately after the completion of the short supplementary board on both those dates," the order adds. The stay on action will continue until September 11, the bench said.

Telangana HC the RBI circular?

The Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, issued in 2016, says that once the bank classifies an account as fraud, it has to report the same to the Central Repository of Information on Large Credits platform to alert other banks. Moreover, if a bank decides to classify the account as fraud straightaway, it has to report the fraud to the RBI within a 21-day period and report the matter to any investigation agency.

Based on the circular, the borrowers were not given any opportunity to present their case before classifying their accounts as fraud accounts, the petitioners claimed. They were also not given copies of the material relied upon by the bank before taking further precipitative action.

In December 2020, the Telangana high court ruled that the borrower must be heard before declaring them as a 'fraudulent borrower'. On March 27, the Supreme Court upheld the Telangana high court order that stayed the RBI circular.

The apex court had held that “the decision classifying the borrower’s account as fraudulent must be made by a reasoned order” to save directions from the “vice of arbitrariness”.

In the present case, the State Bank of India told the Bombay HC bench led by Justice Gautam S. Patel that it had filed a review plea against the Supreme Court order, which is yet to be heard, the Indian Express reported.

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