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JC - Legal Updates - Banks must provide borrowers with an opportunity of hearing before classifying their accounts as fraud under the Master Directions on Frauds

Legal Updates

30 Mar 2023

Banks must provide borrowers with an opportunity of hearing before classifying their accounts as fraud under the Master Directions on Frauds


Rule of audi alteram partem has to be necessarily read into the provisions of Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions 2016 (“Master Directions on Frauds”).

 Technical Details:

“Whether the principles of natural justice should be read into the provisions of the Master Directions on Frauds”

The Supreme Court when posed with this question, observed, and held that:

1)     Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud.

2)    Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrowers and is akin to blacklisting them for being untrustworthy and unworthy of credit by banks.

3)    In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks that the borrowers must be:

(a)    served a notice;

(b)    given an opportunity to explain the conclusions of the forensic audit report and be allowed representation by bank/JLF before their account is classified as fraud; and

(c)    Further, the classification of the borrower’s account as fraudulent must be made by a reasoned order.

4)    Rule of audi alteram partem has to be read into the provisions of the Master Directions on Frauds to save them from the vice of arbitrariness.

For further details, please see:


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Mr. Jayesh H (jayesh.h@jclex.com)
● Mr. Ankit Sinha (ankit.sinha@jclex.com)
● Ms. Sharmistha Ghosh (sharmistha.ghosh@jclex.com)