Borrowers must be heard before fraud tag, says SC

Verdict to delay process, fear banks

- AJAY RAMANATHAN

THE SUPREME COURT on Monday said banks must hear borrowers before classifying an account as 'fraud'. Declaring an account as fraud has serious consequences for the borrower such as the inability to borrow in future, a bench comprising Chief Justice DY Chandrachud and Justice Hima Kohli observed, upholding a Telangana High Court order.

The Telangana HC had in a December 2020 verdict said that the principles of "audi alteram partem" or "hear the other side" must be applied before declaring a borrower as "fraudulent". This is because declaration of fraud entails civil and legal consequences, which results in blacklisting borrowers from accessing institutional finance, it had said. The ruling was challenged in the Supreme Court.

While Monday's SC judgment is aimed at protecting the interests of borrowers, bankers are still assessing the fine print before deciding their next course of action. However, there is a general consensus that the process of tracking defaulters and giving them time for hearing would delay the process of classifying them as wilful defaulters.  

CURRENTLY, A borrower account is declared as fraud based on the findings of a forensic report where the loan has become a non-performing asset (where interest or principal payment is overdue for 90 days).