Silent Fight Between CBI And Banks Over Fair Hearing Of “Old Cases Of Fraud”, Operational Efficiency VS Legal Compliance

A silent dispute is growing between high-street banks and the Central Bureau of Investigation (CBI) concerning historical instances of fraud.

It appears that the central agency is advocating for a retrospective application of last year’s Supreme Court (SC) ruling, which mandates that a borrower be granted a hearing before their account is labelled as ‘fraud.’

Moreover, the SC ruling emphasizes that a “reasoned order” must accompany such actions.

However, in numerous past cases where accounts were classified as ‘fraud’ prior to the SC ruling, the CBI has inquired whether borrowers were afforded the opportunity to present their case, according to a senior industry source.

Bankers, on the other hand, are hesitant to revisit these past issues, arguing that since the decisions to label accounts as ‘fraud’ were made before March 2023 (when the SC ruling was articulated), there’s no obligation to comply with the ruling’s retroactive application.

Nonetheless, the agency has referred several old cases back to banks, seeking clarification on whether borrowers were given a chance to be heard, as per another individual familiar with the matter.

Banks are concerned that revisiting these cases could impede investigations, embolden borrowers to contest matters anew, prolong closures, and potentially derail proceedings in certain instances.

“We’re uncertain about their motives. Perhaps it’s due to their heavy caseload. The industry might collectively address the issue with the CBI and other authorities,” suggested another individual.

Recently, during a routine meeting of the Indian Banks’ Association attended by some bank CEOs, the issue was brought up for discussion.

“CBI is likely exercising caution, raising concerns about natural justice. Additionally, since it’s an SC ruling with significant implications for banks, they want to ensure that due process has been observed,” remarked a banker.

Being labelled as ‘fraud’ or ‘wilful defaulter’ carries a stigma that could prove challenging for borrowers to shake off. Not only does it restrict access to institutional credit, but it also dissuades investors, suppliers, and other stakeholders.

Therefore, the stance adopted by the highest court may have originated from such considerations.

Over 95% of fraud cases pertain to loans. Banks report cases ranging from Rs 3 crore to Rs 25 crore to the CBI’s anti-corruption bureau.

Cases involving amounts between Rs 25 crore and Rs 50 crore are directed to the CBI’s banking cell, while those exceeding Rs 50 crore in irregularities are referred to a CBI joint director.

When one lender identifies a company as a ‘fraud account,’ all banks follow suit.

Typically, by the time an account is marked as ‘fraud,’ it has already become a non-performing asset (NPA) with overdue interest and principal payments of 90 days or more.

Banks monitor ‘early warning signals,’ such as income tax raids or investigations by law enforcement agencies against borrowers, frequent alterations in project specifications, numerous transactions with interconnected entities, departure of key personnel, and delays and defaults to creditors, to designate a borrower as a ‘red flagged account’ (RFA).

Following the red-flagging of an account, a bank typically engages an external auditor or consultant to conduct a forensic audit.
The findings are then presented to a panel comprising directors and members of the managing committee. Within the subsequent 6 months, the bank must either remove the ‘RFA’ designation or categorize the account as’ fraud.’

The Viewpoint
The stance taken by banks regarding the classification of accounts as ‘fraud’ merits consideration from various perspectives.

On one hand, banks operate within a highly regulated environment where adherence to legal and procedural norms is paramount.

They are tasked with safeguarding depositor funds and maintaining the integrity of the financial system. From this standpoint, banks’ reluctance to revisit past cases and apply the retrospective application of the Supreme Court ruling could be seen as an attempt to uphold the sanctity of established decisions and maintain operational efficiency.

Moreover, the banking sector operates under stringent timelines and resource constraints.
Reopening old cases to reassess whether borrowers were given the opportunity to present their case could potentially strain already limited resources and prolong investigations.

This could lead to delays in resolving cases and could hamper efforts to address new instances of fraud or non-performing assets.

Additionally, banks are likely concerned about the practical implications of revisiting past decisions.

The process of reevaluating old cases could open the floodgates for borrowers to contest the classification of their accounts as ‘fraud,’ leading to increased litigation and administrative burden for banks.

Furthermore, there is a risk that revisiting past cases could disrupt ongoing efforts to address the broader issue of non-performing assets and financial misconduct.

However, it’s essential to consider the broader principles of justice and fairness.

The Supreme Court ruling emphasizing the importance of giving borrowers a hearing before labeling their accounts as ‘fraud’ is rooted in principles of natural justice and due process.

Thus, ignoring this ruling in past cases could raise questions about the integrity of the banking system and erode public trust.

The Last Bit, while banks’ reluctance to revisit past cases may be understandable from a practical and operational standpoint, it’s crucial to ensure that their actions align with principles of justice, fairness, and legal compliance.

Hence, finding a balanced approach that respects both the need for operational efficiency and adherence to legal principles is essential in understanding this complex issue.