Banks must provide audit reports before classifying accounts as fraudulent, Bombay High Court rules

GSR Marketing Limited had obtained credit facilities from Union Bank of India, secured by immovable properties owned by third-party guarantors.

After default, the Bank issued a show-cause notice proposing to classify the company’s account as fraudulent and subsequently passed an order classifying it as fraud.

The company challenged both actions, pleading that the Bank had not supplied the internal investigation/audit report or other material relied upon.

The Bank’s notice and order referred to a forensic/internal audit/investigation report considered by its Fraud Monitoring Group.

Whether the Bank was required to provide the audit or investigation reports relied upon for fraud classification before deciding to classify the company’s account as fraudulent.

Whether the show-cause notice and fraud-classification order should be quashed for failure to provide those reports.

The Court applied the Supreme Court’s ruling in State Bank of India v. Amit Iron Private Limited, Civil Appeal Nos. 4243–4244 of 2026, which held that where banks consider audit reports relevant to fraud classification, copies—including forensic audit reports—must be furnished to the borrower and the borrower’s response elicited; disclosure in digital form is sufficient.

The Supreme Court also recognised a limited exception: portions affecting third-party privacy may be withheld for recorded reasons.

The ruling interpreted the RBI’s Master Directions on Fraud and the procedure for fraud classification, building on State Bank of India v. Rajesh Agarwal.

The Bank’s show-cause notice identified the forensic/internal audit/investigation report dated 11 September 2025 as having been placed before the Fraud Monitoring Group, and the classification order stated that it was based on the material on record.

Since the report was considered in reaching the decision, the rule in Amit Iron required the Bank to provide it to the company so that it could make an effective representation.

The Bank’s failure to do so breached that mandatory requirement, irrespective of its contention that the alleged fraud was apparent from the record.

It quashed and set aside the show-cause notice dated 23 March 2026 and the fraud-classification order dated 2 June 2026, while preserving the Bank’s liberty to issue a fresh notice and provide the documents, including reports, on which it proposes to rely.