Supreme Court Re-Examines Banks’ Duty to Offer Personal Hearing Before Declaring Loan Accounts as Fraudulent.


04 November 2025
In a case that could have wide-ranging implications for India's banking and regulatory framework, the Supreme Court of India today initiated detailed consideration of whether banks are mandatorily required to afford borrowers an opportunity of personal or oral hearing before classifying their loan accounts as "fraud."

The matter came up before a bench of Justice J. B. Pardiwala and Justice K. V. Viswanathan in State Bank of India v. Amit Iron Private Limited & Anr. (SLP (C) Nos. 20618–20619 of 2025). The petitions challenge the interpretation of the landmark 2023 ruling in State Bank of India & Ors. v. Rajesh Agarwal & Ors. reported in (2023) 6 SCC 1, which affirmed that principles of natural justice apply to decisions declaring bank accounts as fraudulent.

 

 

Appearing for the State Bank of India, Solicitor General Tushar Mehta argued that the Rajesh Agarwal judgment should not be read to mandate personal hearings in every case. He contended that certain circumstances may make such hearings impractical or counterproductive, as they might frustrate swift action necessary to prevent asset and evidence dissipation once fraud indicators emerge. Mehta submitted that the banking framework must retain flexibility to address fraud decisively without procedural rigidities that could compromise financial discipline.

Senior counsel appearing for the borrowers, K. Parameshwar, rallied for the contrary view and argued that in cases of adverse classification, a borrower is entitled to both notice and an opportunity for oral representation, as the Supreme Court’s judgment in Rajesh Agarwal has settled this proposition of law beyond doubt. Mere calling for a written response, he contended, would not meet the ends of fairness and due process when blacklisting and reputational consequences were involved.

After much debate, the bench directed both sides to submit detailed written submissions, with case law, before the next date of hearing. The Court also asked the bank to outline concrete scenarios under which personal hearings might, in its view, be impracticable or detrimental to effective fraud detection.

Significantly, the judges noted the need for the Reserve Bank of India’s (RBI) perspective and directed that it be impleaded as a respondent in the case. The RBI’s input is likely to be crucial, as it is the authority responsible for issuing the Master Directions governing fraud classification by banks. Advocates involved were instructed to serve copies of all pleadings to counsel representing the RBI, with the case set for final hearing on November 18, 2025. This case raises an important question at the juncture of financial regulation and administrative fairness: the need to balance the imperatives of speedy fraud detection with the borrower's right to procedural justice. A decision by the Supreme Court could reshape bank compliance protocols and give further definition to the contours of natural justice in commercial governance.