Mumbai: The wrangle between the Central Bureau of Investigation (CBI) and high-street banks over crooked clients may soon boil over to the highest court. A few large banks are planning to move the Supreme Court to resolve the differences that have cropped up over borrowers that were tagged by banks as ‘fraud accounts’.
Last year, the highest court had ruled that a borrower must be given a hearing before labelling the account as ‘fraud’. Now, CBI, which is probing many of these cases, insist that the SC verdict stands for all fraud accounts – new as well as old cases – but banks assert that the SC ruling cannot be given ‘retrospective’ effect to cover borrowers listed as frauds before the ruling.
Many banks fear that seeking fresh response on past frauds from dodgy customers could not only mean treading a legal minefield, but even pose a challenge in locating such clients, with a few turning fugitive. The disagreement between the central agency and high-street banks is threatening to stall investigation in multiple cases.
“This is a matter which can only be resolved by the apex court. So, I believe a few of the large banks are planning to appeal before the Supreme Court for ruling out retrospective effect to the matter,” said Sunil Mehta, chief executive of the industry body Indian Banks’ Association. “We have discussed the matter, but many feel this is the only way to go about it. SC should clarify,” Mehta told ET.
Bankers have sensed, during their interactions with CBI officials, that the central agency would stick to its view that the ruling is applicable to future cases (where last year’s SC ruling would be applied ‘prospectively’) as well as old cases (where the ruling would be used ‘retrospectively’ as the borrowal accounts in question were reported to the Reserve Bank of India as ‘fraud’ before March 27, 2023 when the SC gave its ruling).
However, the SC also lays down that “no opportunity of being heard is required before an FIR is lodged and registered,” even as it says that the “principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ joint lenders’ forum” before their account is classified as fraud under the RBI’s Master Directions on Frauds.
Two senior bankers said that while many banks followed such a procedure, it was rarely documented.
“What’s holding back the CBI from probing the matters? The SC ruling clearly says that no opportunity of being heard is required before an FIR is lodged and registered,” said a legal expert. However, according to a senior banker, the CBI won’t act unless the matter has a criminal angle and this, it thinks, is established after an account is classified as ‘fraud’. “Opinion is divided on the matter,” said a bank CEO. “CBI is playing safe in the light of the SC ruling,” said another banker.
CBI may be driven by the stigma that comes with a ‘fraud’ tag which cheeses off a borrower’s clients and investors alike – a point emphasised by SC. Besides, the agency, already loaded with cases, wants to stay clear of matters which could be legally challenged in future.
The matter had reached SC last year following multiple civil appeals before the high courts, questioning the RBI’s ‘Frauds Classification and Reporting by Commercial Banks and Select FIs Directions 2016’ on the ground that no opportunity of being heard is envisaged to borrowers (under this regulation) before classifying their accounts as fraudulent. “The appellants before the SC were then led by State Bank of India. So, it’s possible that SBI may move the court again to seek clarification on the retrospective application of the ruling,” said another person.
Over 95% of the frauds are about loans. Banks report Rs 3-25 crore to the CBI’s anti-corruption bureau, alert the agency’s banking cell for cases upto Rs 50 cr, and irregularities above Rs 50 crore are lodged with a CBI joint director.
