Bank Loan Fraud or Civil Default? How Criminal Cases Over Loans Are Assessed

How these cases begin

Criminal cases over bank loans usually start with a complaint by the bank to the police, the Economic Offences Unit or, for larger public-sector bank frauds, the Central Bureau of Investigation. The allegations are commonly cheating (Section 318 BNS), criminal breach of trust (Section 316 BNS) and forgery (Sections 336 and 338 BNS), with the Prevention of Corruption Act, 1988 where bank officials are involved. Money-laundering proceedings may follow, because cheating and forgery are scheduled offences under the PMLA.

Default is not fraud

Failing to repay a loan is not, by itself, an offence. The law provides civil routes for default: the SARFAESI Act, 2002, the Debt Recovery Tribunals and the Insolvency and Bankruptcy Code, 2016. A criminal case needs more. For cheating, there must be deception and dishonest intention when the loan was obtained, for example false documents, inflated stock statements or a diversion of funds planned from the start.

Fraud classification by banks

Banks classify accounts as fraud under the Reserve Bank of India's directions on fraud risk management. In State Bank of India v. Rajesh Agarwal (2023), the Supreme Court held that borrowers must be given notice, the findings of any forensic audit and an opportunity to respond before an account is classified as fraud, because the classification has serious civil consequences. The Court made clear that this hearing is not needed before an FIR is registered.

What investigators look at

• The loan application, project report and stock or book-debt statements
• End use of funds, traced through the bank statements of the borrower and related entities
• Valuation reports and title documents of the security
• Any forensic audit report
• The role of each director, guarantor and bank official

Directors and guarantors

Criminal liability is personal. A director or guarantor is not liable for an offence merely because the borrower company defaulted; the complaint must show that person's own role. In Sunil Bharti Mittal v. Central Bureau of Investigation (2015), the Supreme Court held that vicarious criminal liability arises only where a statute provides for it.

Remedies

Depending on the facts, the remedies include anticipatory or regular bail, a petition under Section 528 BNSS to quash proceedings that disclose only a civil dispute, a writ against a fraud classification made without a hearing, and a settlement with the bank. Settlement does not end a criminal case automatically, but courts have considered it in quashing petitions where the dispute was predominantly civil.