BackPrinciples mustn’t cede space to the pragmatic
India’s Supreme Court has asked banks to hear defaulters out before classifying their loan accounts as fraudulent. This is likely to vex bankers, but it’s an elementary demand of justice
PremiumThe Supreme Court’s verdict on Monday that said borrowers must be heard out before their accounts are classified as fraudulent has made bankers across India sit up. In ruling so, the apex court upheld a 2020 high court order that was appealed against by State Bank of India, which was keen to go by a master circular issued in 2016 by the Reserve Bank of India (RBI) that let lenders classify the accounts of wilful defaulters as such without taking the latter’s defence onto their record. Back then, a pile-up of bad loans had assumed scary proportions, Kingfisher’s Vijay Mallya was under the scanner for unpaid debts and the sector’s regulator wanted banks to supply speedy data on fraud detection in order to better assess sectoral risk, block fraudsters and help stem the crisis. Today, banks stare at another sort of burden; they must notify and hear debtors seen to have swindled them. A big worry is the bandwidth they’d require for scrutiny if old cases get reopened, as our annual case count runs into thousands. Another is how timelines will get stretched. What RBI had asked for in 2016 was a practical way out. Even so, pragmatism cannot be allowed to trump basic principles of justice.
The judiciary held that since a label of fraud has civil and penal consequences, the classic principle of ‘audi alteram partem’—which requires both sides of a dispute to be heard—cannot be given the go by. Under RBI’s master circular, an entity implicated by a forensic audit report could be barred from institutional credit, along with its promoters and directors, for a long period of time. Also, investigative agencies could instantly get pressed into action for the alleged criminal violations to be probed (and punished if guilt is proven). In circumstances like this, it is only fair that bank-fraud suspects are given a chance by banks to look at damning audit reports and contest the details of what placed them in the dock. The term ‘suspect’ is apt at such an early stage of identifying a crime. After all, an insolvent enterprise could fail to pay its dues simply because it’s broke. So there exist genuine defaults. The concept of a ‘wilful default’, however, opens up a grey zone because it ascribes a will to a defaulter that’s inferred from financial patterns pointing to guilt. The term itself refers to dues left unpaid despite a debtor’s capacity to pay up—typically deduced from funds found diverted for purposes other than those sanctioned (or plainly siphoned off). If a promoter remains wealthy after his venture fails and its loans go bad, then it may look like a scandal on the face of it, but if it’s a publicly held firm with the liability of investors limited to their investment, then a trail of loan-money theft has to be identified for it to qualify as a case of fraud. As fudged books can hide much and escape the eye of auditors, spotting a crime is no easy task. After all, bankers are not sleuths. Throw in crooked networks of collusion in a state-dominated sector, a problem that has persisted long enough to be called structural, and the stink of credit-led bank heists only worsens.
Even if wilful defaults have been rampant, the presumption of innocence until proven guilty must prevail. This basic principle is integral to justice. Public uproars over stark offences often lead to departures from this ideal and lower the bar for conviction. Although stiff provisions might have popular support, Indian banks must minimize the scope for false declarations of fraud. Let borrowers defend themselves before their will is declared mala fide.
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