Fraud classification under banking directions upheld where forensic audit disclosed adverse findings against the borrower's loan account.

RBI's fraud-classification framework under the Master Directions on Frauds was treated as a preventive regulatory mechanism issued under Section 35A of the Banking Regulation Act, 1949, enabling banks to detect, report and monitor suspected fraud. The Court noted that the forensic audit was not a unilateral exercise and that the audit material disclosed adverse findings against the borrower's account. On that basis, the bank's decision to classify the loan account as fraud was upheld. The challenge based on alleged violation of natural justice was not examined on merits because that question was pending before the Supreme Court.

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Issues: Whether the bank's decision to classify the petitioner's loan account as fraud was liable to be interfered with.

Analysis: The Reserve Bank of India is empowered under Section 35A of the Banking Regulation Act, 1949 to issue directions to banks in public interest and for proper banking regulation. The fraud classification framework under the Master Directions on Frauds was treated as an administrative and preventive mechanism intended to detect, report and monitor frauds and to enable banks to exercise caution. The Court noted that the forensic audit was not a unilateral exercise and that the audit material disclosed adverse findings against the petitioner's account. The challenge based on violation of natural justice was not examined on merits because that issue was pending before the Supreme Court.

Conclusion: The account was rightly classified as fraud and no interference was warranted.

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