Non-Compliance With RBI Guidelines Can’t Trigger Criminal Prosecution Against Bank Officers Merely Because Borrowers Belong To SC/ST Communities: Supreme Court

The Court was hearing an appeal by bank officers against the High Court’s refusal to interfere with criminal proceedings arising from an FIR lodged by a company whose loan accounts had been classified as non-performing assets.

A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed: “Admittedly, the respondent enterprise was enjoying credit facilities from the bank which turned NPA in which circumstance, there would have been proceedings initiated. Non-compliance of the RBI’s guidelines and circulars cannot result in a criminal prosecution, merely on the ground that the Directors of the enterprise are the members of scheduled castes and scheduled tribes. There is no specific allegation as to any of the officers having denigrated the directors merely on the basis of their caste. In fact, the very contention of the de facto complainant, as noticed in the order of the High Court is that it is a small-scale industry, predominantly managed by women belonging to the scheduled castes and scheduled tribes; but the Managing Director of the company, the second respondent is not a woman.”

Senior Advocate Rajiv Shakdher appeared for the appellants. Senior Advocate Shadan Farasat appeared for the respondent company and its director, while Advocate Disha Wadekar appeared for the State of Telangana.

Background

The respondent company had obtained credit facilities from the State Bank of India beginning in 2010 and had furnished collateral security. According to its director, the company incurred a capital loss of ₹2 crore during 2012–13 and its accounts were declared NPAs in 2016 despite repayment of a ₹2.90 crore term loan and a further payment of ₹45 lakh towards regularisation.

The company alleged that certain bank officials subjected its promoters to caste-based discrimination. It accused the officers of forging documents and supplying false or frivolous information to their superiors, allegedly causing the exercise of lawful authority to injure or annoy the promoters. The company contended that this attracted Section 3(1)(q) of the SC/ST Act.

The complaint also alleged an economic boycott of small-scale enterprises managed by members of Scheduled Castes and Scheduled Tribes. It claimed that enterprises owned by influential persons belonging to higher castes were granted rehabilitation packages and substantial concessions, while similar relief was denied to the respondent company. Non-implementation of RBI circulars and denial of a rehabilitation package were also alleged.

The bank officers maintained that the documents described as forged or fabricated had been furnished by the company’s directors, who had stood as guarantors for the loan account. The High Court, however, found that the officers had a duty to follow the Central Government and RBI framework governing the revival and rehabilitation of micro, small and medium enterprises and declined to interfere with the prosecution.

Court’s Observations

RBI Circular Dispute Did Not Justify Criminal Proceedings

The Supreme Court observed that the High Court had specifically noticed allegations concerning non-implementation of RBI circulars, denial of a rehabilitation scheme and forgery or fabrication of documents submitted as security for the company’s loans.

The Bench, however, held that the High Court’s finding concerning the officers’ duty to follow the MSME revival and rehabilitation framework did not justify continuing criminal proceedings against them.

The Court stated: “In spite of these compelling circumstance, the High Court refused to consider the case set up by the writ petitioners by referring to various decisions and eventually finding a duty on the accused, the appellants herein to follow the directions issued by the Central Government and the RBI with regard to the framework for revival and rehabilitation of the MSMEs. We are of the definite opinion that this does not justify the invocation of criminal proceedings against the officers of the bank.”

The Court further observed that the company’s accounts had admittedly become NPAs and that recovery proceedings would consequently have been initiated. It found no specific allegation that any officer had denigrated the directors because of their caste and was not convinced that the prosecution should continue on the allegations raised.

Objections Can Be Raised Before Debts Recovery Tribunal

The Court clarified that quashing the criminal proceedings would not prevent the company from raising its objections before the appropriate recovery forum.

The Bench held: “Violation of the circulars and guidelines, refusal to grant rehabilitation package in accordance with the circulars, false information or misrepresentations being made to initiate coercive action against a borrower could all be agitated in a recovery proceedings, and it is for the adjudicating authority to decide as to whether such allegations are legally valid and could interfere with a valid recovery sought by the bank.”

The Court accordingly left those contentions open for consideration by the Debts Recovery Tribunal in the relevant proceedings.

Conclusion

The Supreme Court allowed the appeal and quashed FIR No.1 of 2019, registered on February 4, 2019 at Police Station CID, Hyderabad, along with all proceedings arising from it. The respondent company’s contentions concerning RBI guidelines, rehabilitation measures and the bank’s recovery action were left open to be raised before the appropriate forum. Pending applications were also disposed of.

Cause Title: Chavan Dharmendar and Others v. State of Telangana and Others (Neutral Citation: 2026 INSC 1133)

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