Institute of Legal and Management Studies

The Supreme Court on Tuesday examined the issue whether banks are legally bound to give a personal hearing to account holders before classifying or closing their accounts as “fraud”, and sought the Reserve Bank of India's (RBI) response in the matter.

The Bench of Justices JB Pardiwala and KV Viswanathan was hearing a plea filed by the State Bank of India (SBI) challenging a Calcutta High Court decision that relied on the 2023 judgment in State Bank of India v. Rajesh Agarwal 2023 LiveLaw (SC) 243, which recognised the borrower's right to be heard before the account was closed as fraudulent.

SBI's Argument: Personal Hearing Not Always Feasible

Appearing for SBI, Solicitor General Tushar Mehta contended that the Rajesh Agarwal judgment should not be interpreted to mean that an oral or personal hearing is mandatory in every case.

He argued that there may be situations where granting such a hearing would defeat the very purpose of declaring an account as fraudulent, particularly when immediate preventive measures are needed to protect public money.

Mehta submitted that the bank should be allowed flexibility, citing instances where delay in action could allow the account holder to divert funds or destroy evidence. He relied on earlier case law to support the view that written representations or replies to show-cause notices may suffice in certain circumstances.

Borrower's Stand: Right To Be Heard Is Settled Law

On the other hand, Senior Advocate K Parameshwar, representing the respondent company Amit Iron Pvt Ltd, argued that the Supreme Court in Rajesh Agarwal had categorically held that borrowers are entitled to a meaningful opportunity of hearing, which includes the right to a personal or oral hearing before their accounts are labelled as fraudulent.

Parameshwar emphasised that merely calling for a written response to a show-cause notice is inadequate, as the consequences of being declared a fraud account are “devastating", including being debarred from availing banking facilities for years.

Taking note of the arguments, the Bench directed that the Reserve Bank of India be impleaded as a party respondent, observing that the central bank's presence is essential to assist the Court in understanding the regulatory framework and practical difficulties faced by banks.

The Court also directed both parties to file written submissions along with relevant case law and to specify any exceptional contingencies where banks believe personal hearings should be dispensed with.

The matter will be taken up next on November 18, 2025, when the Court said it will conclude the hearing.

In Rajesh Agarwal, the Supreme Court had held that borrowers must be given an opportunity of hearing before their accounts are classified as fraud under RBI's 2016 Master Directions. After the judgment in Rajesh Agarwal, the Supreme Court in 2023 passed a subsequent order clarifying that borrowers need not be personally/orally heard.

Case : STATE BANK OF INDIA v. AMIT IRON PRIVATE LIMITED & ANR. | SLP(c) 20618-20619/2025