Audit reports must be disclosed by bank before classifying account of a customer as fraud

Audit reports must be disclosed if considered relevant by banks in classifying the account of a customer as fraud – Supreme Court

In a recent judgment, Hon’ble Supreme Court has held that the audit report/forensic audit reports ought to be disclosed if it is considered relevant by the banks in classifying the bank account of a customer as fraud.

ABCAUS Case Law Citation:
5091 (2026) (04) abacus.in SC

The issue in the instant case is with reference to RBI Master Directions on Frauds Classification and Reporting by Commercial Banks. When the loan account of respondent borrower was classified as a Non-Performing Asset (NPA) by the appellant Bank on account of defaults in repayment obligations, a forensic audit was carried out.  Subsequently, a show cause notice was issued alleging various acts of irregularities suggesting fraudulent activity. The respondent was called upon to show cause on the findings in the Forensic Audit Report

Rejecting the response of the respondent, the bank communicated to the respondents that the loan account had been classified as “fraud” and the order passed in this regard was communicated.  

The respondent approached the Hon’ble High Court contending that the borrower should be given an opportunity to explain in person and further that the Forensic Audit Report should be supplied to the borrower. The Writ Petition was allowed by the Single Judge of the Hon’ble High Court and the appeal aagainst it was dismissed by the Division Bench. 

When the matter travelled to the Hon’ble Supreme Court, the questions were as to whether account holder/borrower has an inherent right to a personal/oral hearing before the account is declared/classified as “fraud” under the Master Directions of the RBI? and whether there is an obligation on the banks to furnish the entire Forensic Audit Report to the borrowers before declaration of the account as “fraud”?’

With respect to the inherent right of borrower to a personal hearing it was held that the procedure/steps incorporated in the RBI Master Direction strikes a fair balance between promptitude and fairness and duly comports with the principles of natural justice ensuring fairness to the borrower whose account is likely to be classified as a fraud account.

It was further held that wherever audit reports are available, including forensic audit reports, the same shall be furnished to the borrower and their representation on the report, including on the findings and conclusions be elicited, in case the banks consider the audit report relevant for classifying the account as fraud account. The disclosure by furnishing copies of the audit report, including the forensic audit report to the borrower is mandatory.

However, it was added that if the banks, for reasons to be recorded establish that the disclosure of any part of the report would effect the privacy of third parties, in that exceptional situation banks would be justified to withhold those portions of the report which concern third party rights.

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