Detecting and correcting fraud has long been a weakness for Indian institutions. Nirav Modi, the famed diamond merchant, swindled billions from Punjab National Bank until the lender discovered him seven years later, in 2018. Bankers are considerably poorer at getting fraudsters to pay. Around 18 percent of the total Rs 60,414 crore in fraudulent loans found in 2021–22 were detected more than a decade earlier.
A Supreme Court decision will make the recovery process more difficult for banks. On March 27, the Supreme Court (SC) ruled that the principles of natural justice be included in the Reserve Bank of India’s (RBI) circular on fraud accounts. In other words, lenders cannot label any borrower fraudulent unless they provide the borrower the opportunity to defend themselves via a hearing. This is the result of multiple applications filed by borrowers in several high courts, which were aggregated and taken to the Supreme Court for a decision.
The Supreme Court’s ruling seems to be justifiable on the surface. In all, incorrectly labelling a borrower as fraudulent might shut off crucial financing channels and damage a firm that could otherwise be rescued. Moreover, the stigma of fraud accompanies the borrower for a long time, even after acquittal. It is also reasonable to enable the accused to defend themselves, which is the fundamental core of a just system.
Nevertheless, the court overlooks a fundamental factor that influences its own efficacy. This element is time. The recent ruling addressing the label of fraud is expected to make the process of pursuing recovery by banks significantly more time-consuming. Law experts predict that the legal procedure will be extended much longer. In other words, bankers will take longer to recoup their funds.
This provides swindlers ample time to hide their trails or even seek sanctuary outside of the jurisdiction. Failing to imprison fraudsters risks rendering the judicial system ineffective, which might motivate further similar incidents. After all, the ultimate objective of the court is to prohibit crime with impunity. In the instance of diamantaire Modi, the absence of prompt action allowed the borrower to flee his own country and successfully seek refuge abroad. Even after more than five years, PNB has been unable to collect a respectable sum from the borrower. Mehul Choksi, a co-conspirator, has also eluded capture by escaping.
This choice has an additional consequence. It demonstrates how banks may be taken for granted and even manipulated in a loan deal. Long-winded judicial processes demonstrate that debtors may evade being caught up in time and avoid repayment or even criminal prosecution. In summary, a worst-case scenario allows for more crimes to go unpunished.
It is interesting that the Supreme Court points out that the RBI’s fraud guidelines are thorough. Moreover, the banking regulation has allowed banks to check for early warning indications of probable fraud as well as a single repository where lenders may exchange this information with one another. In reality, the Supreme Court has said that there is no need to hear the accused before filing a first information report (FIR), but lenders must dot every i and cross every ‘t’ before proclaiming the borrower to be a fraud. If the rules are thorough to begin with, there should be no ambiguity about the conclusion of the procedure.
To be sure, lenders have not completely lost their sway in this situation. The lending decision is based on risk assessment standards. The RBI has made it possible for lenders to share information on flagged accounts. Lenders do not need to wait for an official fraud tag to discontinue lending. The Supreme Court has not revoked banks’ ability to make commercial choices.
Moreover, the courts may have prolonged an already time-consuming procedure. But lenders’ ability to decrease fraud losses ultimately depends on their own honest appraisal of a borrower. A court stamp is not required for this.
Aryan Jakhar works as an Editor-in-Chief at The Shining Media. Also, he is an editor at YouthPolitician (digital media situated in Taiwan). He writes his opinions on social issues at YouthKiAwaaz and also on his blogger website.