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The Reserve Bank of India has recently said that lenders should give defaulting borrowers enough time to respond before they are classified as "fraud accounts". The necessary action has been taken to ensure adherence to the principles of natural justice, a fundamental aspect of which is affording both parties involved in a dispute the opportunity to be heard.
This decision was made in response to the ruling by the Supreme Court on March 27, 2023, which mandates that borrowers are entitled to a fair hearing before their accounts can be labeled as fraudulent.
The RBI has updated its master direction on “Fraud Risk Management”, in which it has been mandated that lenders have to issue a detailed show-cause notice (SCN) to persons, entities, and promoters/whole-time and executive directors against whom there are allegations of fraud.
“The SCN shall provide complete details of transactions/actions/events basis which declaration and reporting of a fraud is being contemplated,” the master direction said.
The central bank has said banks will have to issue a show-cause notice to fraudulent entities, with complete details of the fraud. A "reasonable" time of "not less than 21 days" should be provided to such persons or entities to respond to the show-cause notice, it added.
The master direction is applicable to commercial banks; upper-, middle-, and base-layer non-banking financial companies; all India financial institutions; and cooperative banks.
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