Supreme Court verdict on fraud loans may remove hurdles for lenders

Banks will have to set down a proper process, including a platform to hear the views of borrowers and accounts labelled as a fraud, even after a forensic audit finds such delinquents guilty of embezzlement.

Bankers and lawyers said that though the process to declare a fraudulent account may get elongated after the Supreme Court verdict, a detailed standard operating procedure (SoP) will eventually eliminate legal hurdles in the future.

On Monday, a two-judge bench of Chief Justice of India DY Chandrachud and Justice Hima Kohli said that borrowers must be heard before their accounts are classified as fraud, upholding a Telangana High Court order against an appeal by State Bank of India (SBI).

The order does not have retrospective applicability, which means it will not apply to accounts already labelled a fraud.

Bankers and lawyers said the order will standardise the process for declaring fraudulent accounts.

“This is in line with the wilful defaulter norms which are now in place and consistent with the principles of natural justice. Without these norms, we used to see promoters invariably challenging the bank declaration of fraud in courts, which would lead to delays of months. Now though this process will add a few weeks to the bank process, it is still better than endless litigation,” said Bahram Vakil, co-founder of AZB & Partners.

Bankers said they will follow the process already set in the wilful defaulter declaration process.

“Banks anyways communicate with the borrowers in case of wilful default, now it will be the case with the fraud accounts also. In the case of fraud accounts, the declaration of fraud was always after a forensic audit and based on those findings. Now an extra level of communication with the borrower will be added, this may add to the timeframe but it is better than promoters going to court and delaying the process,” said a senior private sector bank executive.

The latest central bank data showed that a total of ₹19,485 crore was embezzled from banks in the first half of the current fiscal, down from ₹36,316 crore a year ago.

Data showed that the average amount of fraud has decreased consistently – down from a recent high of ₹1.85 lakh crore in FY20.

Bankers said declaring an account as fraud was always used as a weapon by banks to put pressure on promoters to pay back a loan as recovery from fraud accounts is difficult. Now that process will also need to take the promoter’s views into account.

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