Bank Fraud: Bombay HC Clarifies Stance On RBI Circular

The Bombay High Court on Tuesday clarified that it did not put a hold on the implementation of the Reserve Bank of India’s (RBI) 2016 directions regarding bank fraud, specifically the “Frauds Classification and Reporting by Commercial Banks and Select FIs” master circular.

A division bench comprising Justice GS Patel and Justice Neela Gokhale issued the clarification in a 9-page order published today.

During the hearing, the division bench had instructed the banks not to take any further action based on the master circular. It was initially reported that the Court had temporarily suspended the circular’s effect until the petitions challenging it are finally heard. However, in today’s published order, the division bench clarified that it did not stay the operation of the Master Circular as a whole.

The division bench specifically emphasized that its order pertaining to the master circular is limited to actions taken by the banks or their in-house committees that contradict a Supreme Court ruling on the matter.

“We have not stayed the operation of the Master Circular (which has not been struck down by the Supreme Court decision). The Supreme Court has only read certain requirements into the Master Circular. It follows, therefore, that actions under the Master Circular consistent with the Supreme Court judgment and decision may undoubtedly proceed,” the bench stated.

The Court specified that this order will remain in effect until September 11, 2023. Importantly, the division bench outlined the actions that banks may take during the period in which the petitions challenging the RBI Circular are pending.

The Court granted banks the freedom to revoke, withdraw, or cancel any previously issued orders under the Master Circular that are inconsistent with the Supreme Court’s judgment. Additionally, the banks were authorized to recommence the process outlined in the Master Circular, ensuring that it aligns with the Supreme Court’s decision.

Furthermore, the bench permitted investigating agencies to proceed with ongoing investigations against the petitioners based on the first information reports (FIRs), as they are not derived from the inquiries conducted under the Master Circular.

“The Supreme Court decision clearly states that no hearing is necessary before filing of FIRs, even if the charge is of fraud accounts. In other words, the investigating agencies are at liberty to file and proceed with FIRs without reference to any findings by the bank under the Master Circular in question. Equally, all remedies available in law to private parties remain unaffected by this order and may be pursued,” the bench noted.

The circular that was under challenge had authorized banks to utilize the Central Fraud Registry to promptly identify, control, report, and mitigate risks associated with fraud. The circular consisted of two provisions:

1. When a bank classifies an account as fraudulent, it becomes the bank’s responsibility to report this information to the Central Repository of Information on Large Credits platform, thus alerting other banks.
2. If a bank decides to immediately classify an account as fraudulent, it is obliged to report the fraud to the RBI within 21 days and also report the case to an investigating agency.

The petitioners who approached the High Court argued that borrowers were not provided an opportunity for a hearing before their accounts were classified as fraudulent in accordance with the circular. They further claimed that the banks were not granting borrowers hearings or providing them with copies of the evidence relied upon before taking subsequent decisive actions.

The matter has been scheduled for a final hearing on September 7-8.