Bank fraud: Not too late to set the record straight
It would serve our banking sector well if the Supreme Court clarifies that its ruling on giving borrowers a hearing before classifying their accounts as ‘fraud’ did not apply retrospectively
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 circumstances, no stone is left unturned to recover the money when a borrower fails to pay up. Bankers spend days, if not months, and sometimes even years meeting defaulters to work out schemes of repayment. Sure, the sector’s regulator frowns on ‘evergreening’ debt (giving more loans in order to get back the original loan), but short of that, banks usually give their borrowers enough opportunity to make good on the promise they made while taking these loans— namely, timely repayment.
It would be good if the Supreme Court were to clarify that its ruling on the due process for classifying accounts as fraud was for prospective application, not retrospective. This would reassure banks that they will not have to revisit past frauds and get bogged down in needless litigation involving stacks of old cases. What qualifies as a hearing and what doesn’t could be a point of dispute if old records are raked up. Ideally, the Supreme Court should presume that certain practices such as giving borrowers—including defaulters—a hearing is embedded in standard banking practice. Let us not risk undoing some of the progress made in the cause of credit discipline, which laws like the Insolvency and Bankruptcy Code have sought to inculcate. If errant borrowers begin to look at their legal options as tools to keep banks dangling, done by filing one challenge after another in courts, lenders might respond by reducing their lending to risky businesses and opting instead for the safer options of lazy banking. This would not only go against the very grain of banking—which is, after all, a business of taking risks—but could also harm the larger economy.