CBI vs banks on fraud: It’s not too late to set the record straight

livemint.com:

At a time when Indian courts are overburdened with cases, it might seem irresponsible to ask for a ruling to be reviewed. Yet, it is sometimes necessary. As reported this week, a few large banks have decided to move the Supreme Court to resolve differences over borrowers tagged as ‘fraud accounts’ by lenders.

Even if it could result in opening up a can of worms, the apex court would do well to take up for review its ruling last year which held that a borrower must be “given a hearing" before the account is labelled as ‘fraud.’ Back then, many seasoned bankers had privately averred that it’s not as if clients get no chance to explain loan defaults. But matters have come to a head, reportedly, thanks to the insistence of the Central Bureau of Investigation (CBI), which is probing many fraud cases, that the apex court’s verdict covers all fraud accounts with retrospective effect. As banks see it, the court’s order does not apply to accounts classified as fraud before it was issued.

This divergence in view needs to be resolved quickly. In practice, as anyone who has worked in a commercial bank knows, defaulting borrowers are given a long rope before the bank resorts to extreme measures like marking accounts out as ‘fraud.’ This is not surprising. Under the Banking Regulation Act of 1949, banking is defined as “the business of taking deposits, repayable on demand or otherwise, for the purpose of lending." It follows from this that bank deposits must be returned to depositors if they want their money back.

A failure to do so could potentially result in a run on the bank and even bring it down. Since these funds are used by the bank to lend on, what it seeks above all is to get its dues back from borrowers on time. Under normal