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State Bank of India v. Amit Iron Private Limited & Ors.

Civil Appeal · 2026 INSC 323Decided 7 Apr 2026
C.A. No.-004243-004244 - 2026 (with connected Civil Appeal No. 4245 of 2026)
Justice J.B. Pardiwala · Justice K.V. Viswanathan

Background

After Amit Iron Private Limited's loan account was classified as a Non-Performing Asset, State Bank of India issued a show-cause notice alleging fraudulent conduct and, after considering the borrower's reply, formally classified the account as "fraud" under RBI guidelines without granting an in-person hearing or supplying the full forensic audit report. Relying on the Supreme Court's earlier ruling in State Bank of India v. Rajesh Agarwal (2023), the Calcutta High Court (and, in a connected case involving Bank of India and M/s Liliput Kidswear, the Delhi High Court) held that borrowers were entitled to a personal/oral hearing and to the complete forensic audit report before such a classification, and both High Courts' rulings were upheld on internal appeal. The banks, along with the RBI (impleaded as a party), appealed to the Supreme Court to clarify what natural justice actually requires in this process.

Decision Breakdown

The Supreme Court held that its earlier Rajesh Agarwal judgment never recognized a right to a personal or oral hearing before an account is classified as fraud: a fair procedure (show-cause notice, consideration of the borrower's written reply, and a reasoned order) satisfies natural justice, and the RBI's 2024 Master Directions correctly codified this. However, on the second issue, the Court ruled decisively in the borrower's favour: disclosure of forensic audit reports (not merely their conclusions) to the borrower is mandatory as a rule, since reasons and rational nexus can only be understood from reading the full report, and banks may withhold only those specific portions that would genuinely harm identifiable third-party rights, with reasons recorded for any such redaction. Applying this, both appeals were partly allowed: the High Courts' directions for a personal hearing were set aside, but their directions to supply the forensic audit reports were upheld, with the banks directed to furnish the reports, allow a fresh reply, and pass new orders under the RBI's Master Directions.

Lesson Learnt

When a bank proposes to declare a loan account "fraudulent," the borrower does not have a right to an in-person hearing, but does have a mandatory right to see the full forensic audit report (not just its conclusions) before a final decision is made: banks can withhold only narrowly, and must give reasons if withholding any part to protect a genuine third-party interest.

Official source (sci.gov.in)View Judgment (PDF)

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