On July 1, 2016, the Reserve Bank of India issued a Master Circular on “Fraud – Classification and Reporting” under Section 35A of the Banking Regulation Act, 1949, which was subsequently updated on July 3, 2017. This circular has been divided into. 11 chapters, one of which is entirely devoted to “Loan Fraud – The New Framework”.
Since its inception, the Master Circular on Fraud has been the subject of intense debate and discussion, and its constitutional validity has been challenged in various courts of the country. The definition, inclusion and imputation of fraud is constitutionally ambiguous and ambiguous, leading to arbitrary and discriminatory proceedings. Therefore, it is open to interpretation by various investigative agencies, which is suited to its needs and wants.
Today, the random use of ‘fraudulent classification of loan accounts’ by banks has resulted in the majority of loan default cases being declared “fraudulent”. Due to the procedural defects inherent in fraud classification, borrowers are approaching various courts to challenge the validity of the Act and RBI circular of fraud classification.
What is even more worrying is that even consulting firms with little judicial background have started declaring loan accounts as fraudulent. Consulting firms have neither a judicial position nor the ability to claim the loan as fraudulent. Today, bank loans are like illegitimate children, without anyone to protect them from various agencies.
However, several problems affect the purpose behind the RBI’s administrative circular. First and foremost, the meaning and meaning of the word ‘cheating’, which is essentially an offence, remains undefined in the grand old Act on Offenses, i.e. the Indian Penal Code 1860 (IPC).
The word ‘cheating’ in section 25 has been defined in the IPC as “a person said to have acted fraudulently if he does so with intent to defraud but not otherwise.” Section 421 of the IPC deals with the offense of ‘dishonestly or fraudulently removing or concealing property’ to prevent distribution among creditors. Another old law that defines ‘fraud’ is the Indian Contract Act 1872 (the Contract Act), which is a civil law.
However, the RBI circular does not define the term ‘fraud’ or ‘fraud’, nor does the RBI circular rely on any other act like the IPC or the Contract Act to decide the ‘classification of borrowers’ as a fraudulent account . Therefore, banks enjoy unbridled power and unlimited freedom at the stage, time and occasion chosen by them to declare a particular loan account as fraudulent.
Similarly, taking advantage of the ambiguity, banks use RBI circulars to blame, blackmail, penalize and ruin the borrower’s account by declaring the borrower’s account as fraudulent. This not only helps banks hide their inefficiencies – lending without adequate security – but also allows them to declare promoters and directors a “fraud”. Thus, bank officials and audit agencies should not have the power to label anything as fraud; At the most, they can red flag the particular transaction and leave it to the court to decide.
The second problem with the RBI circular is that loan accounts of borrowers are being declared as fraudulent without invoking one of the fundamental principles of natural justice, i.e., audi ultrum partem (right to be heard). The borrower should be given a fair and reasonable opportunity to explain his position and position.
Classifying an account as fraud has the cascading effect of destroying the borrower’s creditworthiness and ruining the borrower’s reputation in businesses and society. Various courts have also taken note of the refutation of principles of natural justice before declaring the loan account as fraudulent.
There are ample instances of Indian courts being flooded with petitions challenging the fraud classification made by lender banks under the guise of an RBI circular. Courts have restrained banks from taking any coercive action till a decision is taken on the decision challenging the RBI circular.
The decision of banks to declare a loan account as fraud under the RBI circular and then report the matter to the CBI or any other investigative agency is tantamount to putting a cart before a horse. The decision should be taken after the borrower is allowed a hearing.
Further, the decision to end the fraud should be taken only after a specialized agency has investigated the matter, and the borrower’s explanation is found to be unsatisfactory.