A High Court has quashed a bank's classification of a borrower's account as 'fraud' under the Reserve Bank of India's Master Directions on Fraud Risk Management, holding that the bank's Fraud Identification Committee had merely rubber-stamped the conclusions of an external forensic auditor without recording its own independent reasons for agreeing with those findings. The borrower, Meridian Alloys Pvt. Ltd., had challenged the classification after it triggered an automatic reporting obligation to credit information companies and law enforcement agencies.
The Court held that while banks are entitled to rely on a forensic audit report as an input, the Master Directions require the Committee itself to apply its mind to the material on record, including the borrower's response, if any, to specific allegations, and record its own reasons before finalising a fraud classification. An order that simply reproduces the forensic auditor's conclusions verbatim, without any independent discussion, does not satisfy this requirement and is liable to be set aside as non-application of mind.
The judgment builds on the now-settled position that while an oral personal hearing is not mandatory before fraud classification, the borrower must be given the forensic audit report and a meaningful opportunity to respond in writing, and the Committee's eventual order must engage with that response rather than treating the classification as a foregone conclusion.