Introduction:

On February 28, 2025, the Bombay High Court addressed a petition filed by industrialist Anil Ambani, challenging the Union Bank of India’s (UBI) decision to classify his loan account, associated with Reliance Communications, as “fraudulent.” The division bench, comprising Justices Revati Mohite-Dere and Dr. Neela Gokhale, expressed concern over banks’ tendency to adopt a ‘cut, copy, paste’ methodology from auditors’ reports when declaring accounts as fraudulent, without independent application of mind or adherence to the Reserve Bank of India’s (RBI) Master Circular guidelines.

Petitioner’s Arguments:

Representing Anil Ambani, senior advocate Venkatesh Dhond contended that UBI’s action violated principles of natural justice. He argued that the bank failed to provide a personal hearing and did not furnish the documents relied upon to declare the account fraudulent. Dhond highlighted that the bank’s decision seemed to be a verbatim adoption of the auditor’s findings, lacking independent assessment. He further emphasized that such practices undermine the integrity of financial operations and adversely affect borrowers’ rights.

Respondent’s Arguments:

The Union Bank of India defended its decision by stating that the classification was based on substantial evidence provided by auditors, indicating discrepancies and potential misappropriations in the loan account. The bank maintained that it followed due procedure as per its internal policies and the RBI’s guidelines. Additionally, the bank argued that the urgency claimed by the petitioner was unfounded, as the classification had been made in October 2024, and no significant adverse actions had been taken since.

Court’s Observations and Judgment:

The bench expressed its dissatisfaction with the mechanical approach adopted by banks in declaring accounts as fraudulent. Justice Mohite-Dere remarked that numerous cases have surfaced where banks merely replicate auditors’ reports without independent evaluation, leading to arbitrary classifications. The court underscored the necessity for banks to exercise due diligence and apply their judgment before making such determinations, especially given the public interest involved.

The judges highlighted that the RBI’s Master Circular mandates banks to establish their policies on identifying and handling fraudulent accounts, ensuring adherence to principles of natural justice. The court noted that in this instance, UBI appeared to have bypassed these requirements, rendering its decision procedurally flawed.

In light of these observations, the court directed Anil Ambani to approach the RBI with his grievances, emphasizing that the central bank possesses the requisite authority to address such disputes and ensure compliance with its directives. The bench refrained from issuing protective orders, noting that since the classification in October 2024, no substantial actions had been initiated against Ambani’s companies. The court also urged the RBI to implement mechanisms to prevent banks from issuing perfunctory orders and to enforce accountability for non-compliance with established guidelines.

Conclusion:

The Bombay High Court’s directive for Anil Ambani to seek redressal from the RBI underscores the judiciary’s stance on ensuring that banks adhere to due process and exercise independent judgment when classifying accounts as fraudulent. This case highlights the critical need for financial institutions to move beyond a mechanical reliance on auditors’ reports and to engage in thorough, individualized assessments. The court’s emphasis on the RBI’s role in overseeing and rectifying such practices serves as a reminder of the central bank’s pivotal position in maintaining the integrity of the banking system.

For stakeholders in the financial sector, this judgment reinforces the importance of transparency, accountability, and adherence to procedural fairness. It also signals to borrowers that there are avenues for redressal when due process is overlooked, thereby fostering a more equitable banking environment.