Personal hearing is not mandatory for fraud classification; mandatory disclosure of audit reports satisfies natural justice.

The appellants, State Bank of India (SBI) and Bank of India (BOI), challenged judgments from the Calcutta and Delhi High Courts which quashed orders classifying the respondents' (borrowers) loan accounts as "fraud"

In the SBI matter, the borrower’s account was declared a Non-Performing Asset (NPA) in 2019, followed by a Show Cause Notice (SCN) in 2023 alleging financial irregularities

Despite receiving a reply, the bank classified the account as "fraud" in March 2024 via a speaking order without granting an oral hearing

Similarly, BOI classified M/s Liliput Kidswear as "fraud" in 2025 after two SCNs based on Forensic Audit Reports (FAR), but without a personal hearing

The High Courts quashed these classifications, interpreting the Supreme Court's decision in State Bank of India v. Rajesh Agarwal (2023) to mean that a personal hearing and the full supply of the FAR were mandatory

The Reserve Bank of India (RBI) was impleaded to clarify the application of its Master Directions (2016 and 2024)

1. Whether the decision in Rajesh Agarwal recognizes a right in the borrower to a personal/oral hearing before an account is classified as "fraud" under RBI Master Directions?

2. Whether the issuance of a detailed SCN, consideration of a reply, and a reasoned order satisfy the principles of natural justice?

3. Whether banks are obligated to furnish the entire Forensic Audit Report (FAR) to borrowers, or if providing conclusions is sufficient?

The Court primarily interpreted Section 35A and Section 21 of the Banking Regulation Act, 1949, which empower the RBI to issue directions in the public interest

It applied the principle that natural justice is a flexible concept, as established in A.K. Kraipak v. Union of India, where the specific requirements depend on the facts and statutory framework

The court relied on Union of India v. Jyoti Prakash Mitter, which held that a personal hearing is not necessarily an incident of natural justice except in courts of law

Regarding disclosure, the court applied T. Takano v. SEBI, which mandates the disclosure of all "relevant material" used in adjudication, subject to narrow exceptions like third-party privacy

It also analyzed its previous holding in State Bank of India v. Rajesh Agarwal (2023), which read audi alteram partem into the RBI’s 2016 Master Directions

The Court clarified that Rajesh Agarwal did not explicitly mandate a "personal hearing"; rather, it required an "opportunity of being heard," which can be satisfied through a written representation (SCN and reply)

The Court reasoned that an absolute right to an oral hearing would hamper administrative promptitude, allow fraudsters to dissipate assets, and overwhelm banking infrastructure

It noted that the 2024 Master Directions (Clauses 2.1.1.1 to 2.1.1.4) correctly codified this by requiring a detailed SCN, a minimum of 21 days to reply, and a reasoned order

Regarding the FAR, the Court rejected the banks' argument that providing only "conclusions" was sufficient. It held that the FAR is central investigative material; since findings and conclusions are inextricably linked to the reasoning in the body of the report, the full report must be disclosed to ensure the borrower can effectively represent their case

Redaction is permitted only in exceptional cases where third-party privacy or strategic market information is at stake

SCN, a 21-day reply window, and a reasoned order satisfy natural justice

Banks are mandatory required to furnish the full FAR (or relevant audit reports) to the borrower

The Court set aside the High Courts' directions for personal hearings but upheld the directions to furnish the FAR

The appellant-banks were directed to provide the FARs to the respondents, elicit fresh replies, and pass new reasoned orders in accordance with the 2024 Master Directions