The case of State Bank of India & Ors. v. Rajesh Agarwal & Ors. is a landmark Supreme Court judgment delivered on March 27, 2023 (Civil Appeal No. 7300 of 2022). The judgment addressed the process by which banks classify a borrower’s account as fraudulent.
The case originated from a challenge to the Reserve Bank of India (Frauds Classification and Reporting by Commercial Banks and Select FIs) Directions, 2016 (the Master Directions on Frauds). The problem was that the Master Directions allowed banks to classify accounts as fraudulent without giving the borrower an opportunity to be heard, which has severe consequences, including blacklisting from institutional finance and potential criminal prosecution.
The Supreme Court held that the principles of natural justice, specifically audi alteram partem (the right to be heard), must be "read into" the Master Directions. The ratio decidendi is that before classifying an account as fraudulent, a bank must issue a notice to the borrower, consider their reply, and pass a reasoned order. The Court clarified that while a fair opportunity to respond is mandatory, a personal hearing is not a blanket requirement.
This judgment connects directly to the RBI's Master Directions on Frauds and the constitutional right to practice any profession under Article 19(1)(g). It drew support from the earlier ruling in State Bank of India v. Jah Developers (P) Ltd. (2019), which mandated a hearing before declaring a borrower a wilful defaulter. Following the judgment, the RBI updated its Master Directions in 2024 to formalize the process, mandating a show-cause notice and a minimum 21-day response window before a final reasoned order is passed.