In a crucial ruling for the banking sector, the Supreme Court clarified that banks are not required to provide borrowers a personal or oral hearing before classifying their accounts as fraudulent. On Tuesday, the court held that a written process is enough to satisfy principles of natural justice.
Mint explains the case, the ruling, and what it means for fraud detection by banks and for borrowers.
Q 1) What was the case before the Supreme Court?
The case before a two-person Supreme Court bench arose from appeals filed by banks, including State Bank of India and Bank of India, against orders of the Calcutta and Delhi High Courts. These courts had set aside fraud classifications on the ground that borrowers were not given personal hearings.
In these cases, banks had followed RBI’s process by issuing show-cause notices, receiving written replies, and passing reasoned orders, but had not granted oral hearings. Borrowers argued that this violated the Supreme Court’s 2023 Rajesh Agarwal ruling, claiming it required personal hearings and full disclosure of forensic audit reports.
The earlier ruling had mandated natural justice but did not clarify whether hearings had to be oral, leading to conflicting interpretations by the high court. With courts ruling in favour of borrowers, banks moved the Supreme Court seeking clarity on procedural requirements.
Q 2) What did the Supreme Court rule?
The Supreme Court held that fraud classification is a document-based, administrative process and does not require a personal or oral hearing.
It agreed with banks and RBI that written submissions, through show-cause notices, replies, and reasoned orders, are sufficient to meet principles of natural justice.
The court said mandatory hearings would be impractical and counterproductive, potentially delaying action and allowing borrowers to misuse time.
At the same time, the court introduced an important safeguard ruling that banks must share audit and forensic audit reports with borrowers so they can respond meaningfully.
However, banks may redact limited portions where disclosure could affect third-party rights or privacy, making disclosure the rule and redaction the exception.
Q 3) What does this mean for banks?
The ruling provides much-needed legal clarity and operational flexibility, according to banking and legal experts. The removal of mandatory oral hearings allows faster fraud classification and reporting, which is critical for preventing fund diversion and limiting systemic risk.
“For banks, this is a significant relief. The spectre of mandatory personal hearings had raised fears of procedural gridlock, particularly in large consortium lending cases involving multiple promoters and complex transactions,” said Tushar Agarwal, founder and managing partner, C.L.A.P. JURIS, Advocates and Solicitors.
Vivek Iyer, partner and national leader Financial Services Risk at Grant Thornton Bharat LLP, said, "If you look at the larger background of the case, the judgment helps create a healthy investment climate in the country by enhancing the ease of doing business.
The practice of oral hearings had the potential to implicate genuine cases as fraud, which is against the principles of natural justice, as the Supreme Court has acknowledged.
The process, indicated by a show-cause notice and forensic investigation, ensures fairness. This helps create the right credit culture in the country.
Q 4) What does this mean for borrowers?
Lawyers said the judgment is not entirely one-sided, even though it tilts in favour of banks. Borrowers lose the right to a personal or oral hearing, meaning they must rely on written submissions to defend themselves against fraud classification. This puts greater pressure on timely and detailed responses to show-cause notices.
“It is not a blanket win for either side; it is a calibrated compromise,” said Manisha Shroff, partner at Khaitan & Co.
Sharing forensic audit reports helps borrowers clearly understand the case against them and respond effectively, according to Sameer Jain, managing partner at PSL Advocates & Solicitors. It also allows them to challenge findings, making the process more transparent and fair.
Q 5) How big is the fraud problem?
The Supreme Court judgment noted that banking frauds remain significant and concerning, describing the figures as ‘alarming’. It cited RBI data showing that in FY 2022–23, there were 13,494 fraud cases involving ₹18,981 crore, which jumped to 23,953 cases involving ₹36,014 crore in FY 2024–25.
The court also noted that banks withdrew 783 fraud cases worth ₹1.12 trillion after a 2023 Supreme Court ruling on compliance with natural justice.
Mint earlier reported, citing RBI data, that bank fraud trends show a mixed pattern, with fewer cases but higher amounts involved. In April–September 2025-26, banks reported 5,092 fraud cases, sharply down from 18,386 a year earlier, but the total value rose to ₹21,515 crore from ₹16,569 crore. This continues the trend seen in 2024-25, when frauds declined to 23,879 cases but the amount jumped to ₹34,771 crore, partly due to reclassification following the Supreme Court’s 2023 ruling.
High-value frauds appear to be declining. Meanwhile, card and internet fraud dominate by volume, accounting for nearly 67% of cases, while loan-related fraud accounts for the bulk of the value. Private banks lead in the number of cases, whereas public sector banks account for over 70% of the total amount involved.
Q 6) How does the fraud detection system work?
Accounts are monitored for early warning signals, such as defaults or irregular transactions, with banks following the RBI’s Master Directions on Frauds, 2016, and the Fraud Risk Management Directions, 2024.
Suspicious accounts are marked as Red Flagged Accounts and investigated, often through forensic audits.
Before classifying fraud, banks must issue a show-cause notice, allow a written response, and pass a reasoned order.
Once classified, cases are reported to RBI, investigative agencies, and shared systems such as RBI’s database, Central Repository of Information on Large Credits, ensuring that other lenders are alerted and systemic risk is contained.