Introduction
The Supreme Court in its recent judgement in State Bank of India v. Amit Iron Pvt. Ltd. and Ors reported in 2026 SCC OnLine SC 538 has settled the law with respect to the issue of whether a borrower is entitled to an opportunity of personal/oral hearing before the borrower’s account is declared as “fraud” under the 2024 Master Directions issued by the Reserve Bank of India (“RBI”).

The Supreme Court in State Bank of India v. Rajesh Agarwal reported in (2023) 6 SCC 1 (“Rajesh Agarwal”), had examined the validity of the RBI’s 2016 Master Directions on fraud classification. These 2016 Master Directions were challenged on the ground that they did not provide borrowers any opportunity of making a representation before their accounts were declared as fraudulent.

The Court in its judgment in Rajesh Agarwal (supra) upheld the 2016 Master Directions but read into it the principles of natural justice to save it from arbitrariness especially where there are grave civil consequences. It held that borrowers must be served a show cause notice, given an opportunity to explain the conclusions of the forensic audit report, and a reasoned order has to be passed taking into consideration all material information.

In 2024, the RBI issued the Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions Directions, 2024 (“2024 Master Directions”). Chapter II of these Directions laid down the procedure to be followed before a borrower’s account could be declared fraudulent. Significantly, the 2024 Master Directions, in a footnote, expressly referred to Rajesh Agarwal (supra), thereby incorporating the principles of natural justice identified in that judgment as essential safeguards in fraud classification proceedings. However, in the 2024 Master Directions, an opportunity of personal/oral hearing was not provided for.

Therefore, the issue that arose for consideration in the present dispute was with respect to the absence of an opportunity for personal/oral hearing. The Calcutta High Court held that an opportunity has to be given for personal/oral hearing to the borrower as per the judgement rendered by the Supreme Court in Rajesh Agrawal (supra) and the same has to be read into the 2024 Master Directions.

Legal Issues
The legal issues as framed by the Supreme Court is as under:-

1. Whether State Bank of India and Ors v. Rajesh Agarwal and Ors (2023) 6 SCC 1 recognizes a right inhering in the account holder/borrower to a personal/oral hearing before the account is declared/classified as “fraud” under the Master Directions of the RBI?
2. Whether the issuance of a show cause notice, the consideration of the reply filed by the borrower and the obligation to pass a reasoned order setting out the relevant facts/circumstances relied upon, the submissions made in response to the show cause notice and the reasons for classification of account as “fraud” would satisfy the principles of natural justice?
3. Whether there is an obligation on the banks to furnish the entire Forensic Audit Report to the borrowers before declaration of the account as “fraud”?’ If not, whether the furnishing of the conclusions of the Forensic Audit Report would serve the ends of justice?

Court’s Decision/Analysis

Principles of Natural Justice
The Court reaffirmed that natural justice is a flexible principle, not a rigid formula. Its application depends on the nature of the decision, the statutory framework, and the consequences involved. The principle of audi alteram partem requires that no person be condemned unheard, but the form of representation/explanation i.e., oral or written varies with context. Relying on A.K. Kraipak v. Union of India reported in (1969) 2 SCC 262 and Natwar Singh v. Directorate of Enforcement reported in (2010) 13 SCC 255, the Court emphasized that fairness in procedure is essential to prevent arbitrariness.

Right to Personal Hearing
The Court clarified that in Rajesh Agarwal(supra) did not recognize a borrower’s right to a personal/oral hearing before classification of an account as fraud. It held that what mandated was the issuance of a show cause notice, consideration of the borrower’s reply and representation, and the passing of a reasoned order. It was also held that oral hearings are not a matter of right but may be granted at the discretion of the authority if circumstances require. Relying on SBI v. Jah Developers reported in (2019) 6 SCC 787 and Gorkha Security Services v. Government of NCT of Delhi reported in (2014) 9 SCC 105, the Court held that written representation suffices to meet the requirements of natural justice.

Nature of Fraud Classification
The Court reasoned that fraud classification is primarily documentary in nature, based on loan documents, financial statements, and forensic audits. Borrowers are already in possession of or aware of these materials. Therefore, written representation is sufficient to meet the ends of justice.

It was also held by the Court that if personal/oral hearing is provided as matter of right to every single borrower then the same would put extreme pressure on the financial institutions and would also cause extreme delay in passing an order. The delay that is likely to be caused would defeat the purpose for which the 2024 Master Directions were issued. The Master Directions were issued so as to enable the financial institutions to classify an account as “fraud” in a time bound manner. If personal/oral hearings are granted as a matter of right then the same would cause delay thereby, putting public money at risk.

Disclosure of Forensic Audit Reports
The Court however, held that wherever audit reports, including forensic audit reports, are available and considered relevant for fraud classification, they must be furnished to the borrower. The Court held that the borrower is entitled to forensic audit reports and any other document which forms the basis of the Show Cause Notice. It further held that disclosure of such reports is mandatory, and supply in digital form constitutes valid compliance.

RBI’s 2024 Master Directions
The Court observed that the RBI, in its 2024 Master Directions correctly understood the directions of the Court in the case of Rajesh Agarwal (supra) and has incorporated the directions given in the said judgement. These 2024 Master Directions require the issuance of a detailed show cause notice, reasonable time for reply, examination of the borrower’s response, and a reasoned order to be passed. This procedure strikes a fair balance between fairness to borrowers and the need for promptitude in fraud detection and ensuring compliance with principles of natural justice.

Conclusion
The judgement in State Bank of India v. Amit Iron Pvt. Ltd. and Ors reported in 2026 SCC OnLine SC 538 therefore, clarifies and puts to rest the issue of whether a borrower against whom a Show Cause Notice is issued with respect to classification of its account as fraud is entitled to a personal/oral hearing. The Supreme Court has held that there is no inherent right of a borrower for a personal/oral hearing and that the opportunity given to the borrower to make a reply/representation is sufficient enough to comply with the principles of natural justice as envisaged by the Court in Rajesh Agarwal (supra) especially in light of the objective of the 2024 Master Directions to classify an account as fraud in a prompt and timely manner.

By - C. George Thomas and Gurkaranbir Singh