Bombay High Court: Bank Must Record Detailed Reasons While Classifying Borrower’s Account as Fraud

1. Background of the Dispute

The Bombay High Court, in Zusak Agro Pvt Ltd Vs State Bank of India, examined the legality of an order passed by State Bank of India (SBI) on 13 January 2026, by which the bank categorized the account of Zusak Agro Pvt Ltd as “fraud” and indicated that the assessee’s name would be reported to the Reserve Bank of India (RBI) in line with the applicable regulatory framework.

The writ petition, numbered Writ Petition No. 2092 of 2026, challenged this fraud-classification order primarily on the ground that it did not meet the mandatory requirement of being a “reasoned order” as prescribed in the RBI’s Master Directions on Fraud Risk Management dated 15 July 2024.

The Court issued Rule, made it returnable forthwith, and proceeded to decide the matter with the consent of both parties.

2. Facts Leading to the Fraud Classification

2.1 Sanction of Credit Facility and Collateral Valuation

  • SBI extended a cash credit facility of Rs.9.50 crores to Zusak Agro Pvt Ltd.
  • The facility was sanctioned on 13 July 2018.
  • At the time of sanction, the collateral property supporting the credit was valued at Rs.9.52 crores as per a valuation report dated 7 April 2018 issued by Shri Sunil Deshpande.

Subsequently, another valuation exercise was carried out:

  • A later valuation report dated 19 November 2020 prepared by M/s Vastukala Consultants Pvt Ltd. assessed the same collateral at Rs.4.73 crores.
  • According to SBI, this reflected erosion in value of more than 50%.

On the strength of this substantial drop in valuation and related allegations, SBI initiated steps under the RBI’s fraud-classification framework contained in the circular dated 15 July 2024.

2.2 Show Cause Notice and Reply

  • A show cause notice (SCN) dated 22 October 2024 was served on Zusak Agro Pvt Ltd.
  • The SCN referred to the above facts, including the decline in collateral value and assertions regarding misappropriation of funds.

In response:

  • Shri Vivek Kumar Mathur, Director of the petitioner company, submitted a detailed reply by a letter dated 8 November 2024.
  • The representation contested the allegations and provided explanations in relation to the transactions and the valuation reports.

Thereafter, the matter was placed before the Review Committee / Fraud Identification Committee of SBI.

2.3 Review Committee Meeting and Impugned Order

  • A Review Committee meeting for identification of the account as fraud was held on 29 December 2025.
  • Relying on this internal process, SBI issued the impugned order dated 13 January 2026, classifying the petitioner’s account as “fraud” and indicating consequential reporting to RBI.

This order became the subject of challenge before the Bombay High Court.

3.1 Master Directions and Governance Requirements

The petitioner strongly relied upon the “Master Directions on Fraud Risk Management” issued by RBI on 15 July 2024, bearing No. RBI/DOS/2024-25/118/ DOS.CO. FMG. SEC. No.5/23.04.001/2024-25. These directions, inter alia, lay down a structured governance framework for fraud risk management in banks under Chapter II.

The Court reproduced and focused on the following specific provisions from Chapter II, clause 2.1:

  • 2.1 Governance Structure in banks for Fraud Risk Management
  • 2.1.1 mandates a Board-approved policy on fraud risk management and adherence to principles of natural justice.

Among the minimum requirements, the following sub-clauses are important:

  • 2.1.1.1 – Requires issuance of a detailed Show Cause Notice to the concerned Persons/Entities and their Promoters / Whole-time and Executive Directors, setting out complete details of the transactions, actions or events forming the basis of possible fraud declaration.
  • 2.1.1.2 – Requires that a reasonable time of not less than 21 days be allowed to respond to the SCN.
  • 2.1.1.3 – Requires a proper system for issuing SCN and examining the responses before declaring any Person/Entity as fraudulent.
  • 2.1.1.4 – States that: