Bank rightfully declared account as fraud based on forensic audit findings under RBI Master Circular Section 35A

Telangana HC dismissed writ petitions challenging a bank's declaration of petitioner's account as fraud. The petitioner argued that the Forensic Audit did not conclude fraud and violated natural justice principles. The court examined the audit report and found adverse findings against the petitioner company. HC held that the bank rightfully declared the account as fraud based on forensic audit findings, following due process under RBI's Master Circular issued under Section 35A of Banking Regulation Act, 1949. No illegality or infirmity warranted judicial interference.

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Issues Involved:
1. Declaration of the petitioner’s account as ‘fraud’ by the respondent bank.
2. Validity of the Reserve Bank of India’s Master Circular dated 01.07.2016.
3. Violation of principles of natural justice and fair play.

Issue-Wise Detailed Analysis:

1. Declaration of the petitioner’s account as ‘fraud’ by the respondent bank:
The petitioner, a company engaged in the manufacture of edible oils and other products, availed credit facilities from a consortium of banks led by Andhra Bank (now merged with Union Bank of India). The petitioner’s account was declared as a Non-Performing Asset (NPA) on 14.05.2018. Subsequently, a forensic audit was conducted, which the petitioner claims did not find any fraudulent activity. Despite this, the respondent bank declared the petitioner’s account as ‘fraud’ based on the audit report and other findings, which included multiple devolvements of Letters of Credit (LCs), misutilization of funds, and significant financial irregularities. The court found that the forensic audit report did contain adverse findings against the petitioner, justifying the bank's decision to declare the account as ‘fraud’.

2. Validity of the Reserve Bank of India’s Master Circular dated 01.07.2016:
The petitioner challenged the validity of the RBI’s Master Circular on the grounds that it violated principles of natural justice by not providing an opportunity for a hearing before declaring an account as ‘fraud’. The RBI defended the Master Circular, stating that it was issued under Section 35A of the Banking Regulation Act, 1949, in public interest to detect and report frauds early. The court noted that the Master Circular provides a comprehensive mechanism for fraud detection and reporting, involving multiple checks and balances. The RBI’s directions were deemed necessary for maintaining the stability of the banking system, and the court did not find the Master Circular to be arbitrary or violative of natural justice.

3. Violation of principles of natural justice and fair play:
The petitioner argued that the bank’s action of declaring the account as ‘fraud’ without a hearing violated the principles of natural justice. The petitioner relied on a previous judgment (Rajesh Agarwal v. Reserve Bank of India) where the court held that the principle of audi alteram partem should be included in the Master Circular. However, the Supreme Court had stayed the observation regarding the requirement of a personal hearing in that case. Given this, the court in the present case did not delve into the issue of natural justice, as it was pending before the Supreme Court. The court concluded that the forensic audit was conducted with the petitioner’s participation, and the audit report justified the classification of the account as ‘fraud’.

Conclusion:
The court dismissed the writ petitions, upholding the bank’s decision to declare the petitioner’s account as ‘fraud’ and the validity of the RBI’s Master Circular. The court found no illegality or infirmity in the decision-making process and stated that the bank followed due process as prescribed under the Master Circular. The petitions were dismissed with no order as to costs.

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