The Delhi High Court’s recent judgment in Ratul Puri vs. Bank of Baroda sets a crucial precedent: before branding a borrower a “wilful defaulter”—an act often described as inflicting “civil death”—banks must present verified, objective evidence of intent and misdirection of borrowed funds. The Delhi High Court has held that the classification of Ratul Puri, former director of Moser Baer India Limited, and his mother Nita Puri as “wilful defaulters” under the Reserve Bank of India (RBI) Master Circular is “legally unsustainable”.
A division bench of Justices C Hari Shankar and Ajay Digpaul passed the order while dismissing appeals filed by the Bank of Baroda (BoB) and the Punjab National Bank (PNB).
The bench held that the “wilful defaulter” declarations were legally unsustainable since the banks had failed to establish, “through verified and objective material, that the transactions in question involved borrowed funds that had been intentionally diverted or siphoned off”. This underscores a critical point—determining willful default or fraud should not be left to banks, as their decisions may be influenced by self-interest.
This ruling builds on broader reforms, reinforcing the delicate balance between institutional vigilance and individual justice. The ruling also acknowledges that there is a strong stigma attached to defaulters and NPAs (Non-Performing Assets). Entrepreneurs are becoming hesitant to take loans due to fear of being wrongfully labeled as willful defaulters. This fear among entrepreneurs further dampens the country’s entrepreneurial appetite at a time when risk-taking is already in short supply.
Building on Reform: Natural Justice in Fraud Classification
Last year, the Reserve Bank of India revised its master directions on fraud risk management to incorporate the recommendations of a Supreme Court judgement which asks banks to hear a borrower before an account is classified as fraud.
In the SBI versus Rajesh Agarwal case, a Supreme Court bench led by former CJI DY Chandrachud batted for the rights of the borrower to be heard before an account is classified as fraud.
Such determinations should be handled by an independent body to ensure fairness in guidelines and the law—particularly as India already has adequate criminal laws to punish offenders, but no corresponding protective laws for genuine defaulters.
The Excess of Institutional Power: LOCs and Fundamental Rights
Yet, the system sometimes tilts toward banks, which, as parties to borrower-lender commercial contracts, hold significant authority to label defaulters—often deflecting accountability for their own missteps. This conflict of interest fuels a bias that protects institutional interests over equity. The Bombay High Court underscored this in April 2024, striking down a government clause empowering public sector bank leaders to seek Look Out Circulars (LOCs) against defaulters or guarantors. The court deemed it arbitrary and a violation of fundamental rights, a view echoed by former Financial Services Secretary D.K. Mittal, who argued last year that such actions lack thorough investigation, unlike those by agencies like the CBI. He had noted that defaults often stem from external pressures, not willful intent, with only a minority of borrowers aiming to evade repayment.
A Case for Reform: From Adversarial Labels to Equitable Processes
Reinforce procedural fairness:
Understanding that fraud or defaulter tags carry lifelong consequences, the judiciary has demanded that banks tread with care—providing reasoned orders and opportunities to be heard.
Reassert independent scrutiny:
The Puri judgment illuminates the conflict of interest when banks alone adjudicate guilt. Delegating review to an independent body—possibly under RBI guidance—would inject much-needed impartiality and protect genuine entrepreneurs from wrongful branding.
Prevent executive overreach:
LOC issuance, though cloaked in “economic interest,” lacks clarity and legal foundation. The Bombay HC’s ruling affirms that such travel restrictions demand statutory support—not discretionary fiat.
Preserve entrepreneurial spirit:
Start-ups and SMEs are dissuaded when aggressive institutional measures like wilful defaulter labels and LOCs loom over them. Ensuring rights-based, evidence-driven processes can sustain confidence and innovation. Entrepreneurship should be able to grow in the country, but at present, few are willing to take risks under such uncertainty.
The Ratul Puri ruling is not merely a judgment—it is a guiding light for a fairer, more balanced banking regime. Coupled with the due-process mandates of Rajesh Agarwal and the Bombay HC’s LOC ruling, India now has a foundation for reform grounded in constitutional values.
Recalibrating banking regulation to protect both system integrity and borrower rights is not only just—it is also essential for long-term economic vibrancy, innovation, and trust in financial governance.
But the borrower–lender relationship is, at its core, contractual, which makes it untenable for one party to unilaterally decide on allegations of fraud or wilful default. The logical next step is to establish an independent authority under the RBI, functioning on the lines of an ombudsman, to scrutinize evidence, hear both sides, and give reasoned decisions.
Such a body would eliminate conflicts of interest, protect genuine entrepreneurs from arbitrary branding, and still hold bad actors accountable. By institutionalizing independent oversight, India can strike the right balance between financial discipline and entrepreneurial freedom, ensuring long-term vibrancy, innovation, and trust in financial governance.
(The views expressed are those of ther author, and do not reflect the position of ET LegalWorld)
