Detecting and correcting fraud has long been a weakness for India’s institutions. Nirav Modi, the notorious diamond merchant, swindled billions from the Punjab National Bank until it was discovered seven years later, in 2018. Bankers are considerably poorer at obtaining payment from scammers. Around 18 percent of the total Rs 60,414 crore in illegal loans in 2021–22 were found more than a decade earlier.
A Supreme Court ruling will make the recovery process more difficult for banks. The Supreme Court (SC) ruled on March 27 that the principles of natural justice should be included in the Reserve Bank of India’s (RBI) circular on fraud accounts. In other words, lenders cannot label a borrower fraudulent unless the borrower is given the opportunity to defend themselves via a hearing. This is the result of multiple petitions filed by borrowers in several high courts that were aggregated and submitted to the Supreme Court for a decision.
On the surface, the Supreme Court’s ruling seems to be warranted. In all, incorrectly labelling a borrower as fraudulent might sever vital financing channels and kill a firm that could otherwise be rescued. Moreover, the stigma of deception accompanies the borrower for a long time, even after he or she has been acquitted. It is also reasonable to enable the accused to defend themselves, which is the cornerstone of a just system.
Nevertheless, the judiciary overlooks a vital component that affects its own efficacy. This is the element of time. The recent ruling addressing the label of fraud is expected to lengthen the process of pursuing recovery by banks. Law experts predict that the legal procedure will become much longer. In other words, bankers will have to wait longer to get their money back.
This allows swindlers to disguise their trails or even seek refuge outside of the jurisdiction. If you don’t put fraudsters in jail, you risk making the justice system useless, which could lead to more fraud.After all, the judiciary’s ultimate objective is to prohibit crime with impunity. In the instance of diamantaire Modi, the borrower was allowed to flee his own country and seek refuge abroad due to the absence of prompt action. PNB has failed to collect a respectable sum from the borrower after more than five years. Mehul Choksi, a co-conspirator, has also evaded arrest by leaving.
This judgement has also resulted in another conclusion. It demonstrates how banks may be taken for granted and even abused in a loan deal. Long-winded judicial processes demonstrate that debtors may avoid being brought up in time and evade repayment or even criminal prosecution. In summary, a worst-case scenario allows more crimes to go unpunished.
It’s odd that the Supreme Court points out that the RBI’s fraud standards are thorough. Indeed, the banking regulator has given banks the ability to seek out 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 process’s result.
To be sure, lenders have not completely lost their mojo in this situation. The decision to lend is based on risk assessment criteria. The RBI has authorised lenders to share information on flagged accounts. Lenders do not need to wait for an official label of fraud to halt lending. The Supreme Court has not denied banks the ability to make commercial judgements.
Moreover, the courts may have lengthened an already time-consuming procedure. But lenders’ capacity to prevent losses from fraud is ultimately determined by their own honest appraisal of a borrower. There is no need for a court stamp for this.