NEW DELHI: The Supreme Court has called for banks to compensate victims of digital fraud when a failure to exercise due diligence contributes to their losses, putting financial institutions’ accountability under scrutiny as cybercrime continues to drain money from unsuspecting customers.
The court asked the Reserve Bank of India (RBI) to incorporate mandatory compensation provisions into its proposed regulatory framework. Under the proposed approach, financial institutions would have to compensate victims for at least the amount lost when their failure to meet due diligence obligations is established.
The bench, led by Chief Justice Surya Kant, also stressed that banks should identify and pause suspicious transactions before funds are transferred. Transactions that sharply deviate from a customer’s established banking pattern could be temporarily withheld while their authenticity is verified.
The proposed safeguards include automatic alerts to the relevant police station and verification measures before suspicious transfers are allowed to proceed. The court also sought details of the financial institutions that would fall within the scope of the proposed rules.
The RBI’s proposed Know Your Customer Amendment Directions, 2026, are expected to be notified by November 30 and operationalised by December 31. The court’s observations form part of proceedings examining how banks and regulators can prevent digital fraud and improve recovery for victims.
The bench also raised concerns over mule accounts, which are used to receive and transfer money obtained through cybercrime. Such accounts can make it difficult for investigators to trace stolen funds after they move through multiple transactions.
Digital arrest scams typically involve fraudsters impersonating police officers or other government officials. They threaten victims with arrest or legal action and pressure them into transferring money. The court has questioned why banks fail to flag suspicious transfers when they differ significantly from a customer’s usual banking activity.
During the hearing, the Chief Justice referred to losses from digital arrest scams approaching Rs 800 crore this year. The court’s focus has been on moving beyond action after a fraud occurs towards systems that can detect suspicious activity and intervene before customers lose their money.
The proposed framework could make banks more accountable where lapses in due diligence contribute to fraud. However, the compensation requirement is still part of the proposed regulatory process and should not be understood as an existing guarantee of reimbursement for every digital fraud victim.