On Monday, the Reserve Bank of India (RBI) master circular, which allowed banks to label any account as a fraud account without holding a hearing, was put on hold by the Bombay High Court until September 11. Under the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions of 2016, the High Court will hear petitions challenging the RBI decision in September.
Naresh Goyal, the founder of Jet Airways, and his wife Anita Goyal filed a suit alleging that the RBI’s judgement violated the principle of natural justice, which was being heard by a division bench of Justices Gautam S. Patel and Neela K. Gokhale.
The mentioned circulars enabled banks to fully utilize the Central Fraud Registry for prompt fraud risk identification, control, reporting, and mitigation.
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What the RBI circular mentions:
According to the circular, a bank must notify other banks of an account it has determined to be fraudulent by reporting it to the Central Repository of Information on Large Credits platform. Furthermore, if a bank decides to categorize the account as fraud right away, it must notify RBI of the fraud within 21 days and notify any investigating agency of the situation.
The petitioners argued that, in accordance with the circular, borrowers were not given the chance to be heard before their accounts were labelled as fraud accounts. As a result, the banks refused to grant borrowers a hearing or copies of the documents used to support further action.
The Supreme Court has taken the matter into consideration in an appeal against the Telangana High Court’s ruling, the bench was informed. The Telangana High Court judgement that vacated the RBI decision was maintained by the highest court on March 27.
The SC had ruled that “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 before their account is classified as fraud under the Master Directions on Frauds”
To avoid falling victim to the “vice of arbitrariness,” it was decided that the “decision classifying the borrower’s account as fraudulent must be made by a reasoned order. The State Bank of India informed a Justice Patel-led panel that it had submitted a review petition challenging the SC order, which has not yet been heard.
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