Banks will be held liable to compensate victims of digital fraud: Supreme Court

Taking a strict stance on the rising cases of digital fraud, the Supreme Court has clarified that if customers are defrauded due to the negligence of banks, the financial institutions will be responsible for fully compensating the loss. The Supreme Court stated that banks should act as a 'protective shield' for their customers. In this matter, the Supreme Court also pulled up the Reserve Bank of India (RBI) and emphasized fixing the accountability of banks in cases of cyber fraud.

A bench led by Chief Justice (CJI) Surya Kant, comprising Justice Joymalya Bagchi and Justice V. Mohana, heard the suo motu matter. The court questioned that when financial institutions can waive off loans worth crores of rupees as one-time settlements, why can they not be held responsible for the losses suffered by customers? The court further added that if bank employees are found to be involved in such fraud, the banks must compensate the victim.

During the hearing, Senior Advocate N.S. Nappinai, appearing as amicus curiae, informed the court that despite continuous efforts, the scams are continuing. She mentioned a recent incident in which a woman lost ₹2.5 crore. In such frauds, the perpetrators pose as police officers, government officials, or judicial authorities and force the victim to transfer money by threatening them with arrest.

Questioning the functioning of banks, Chief Justice Surya Kant said, "Protecting victims is your duty as bankers; what are the competent authorities doing?" Giving an example, he asked that if a person usually withdraws only ₹10,000 or ₹20,000 and suddenly ₹50,000 is withdrawn from their account, should the bank not flag this transaction immediately? The court also noted that customers have allowed banks to use their account details and transaction history, so banks should exercise caution.

The court clarified that victims of crimes like 'digital arrest' should receive compensation of at least the full amount lost if the fraud is found to be due to a lack of due diligence by the bank. Emphasizing mandatory preventive measures for banks, the court said their inaction in cases of fraud is unacceptable. Banks must immediately inform the nearest police station about unusual transactions.

Attorney General R. Venkataramani, appearing on behalf of the Central Government, stated that due to the Supreme Court's intervention and public awareness campaigns, there has been a 50 percent reduction in 'digital arrest' cases compared to last year. However, the Chief Justice noted that despite this reduction, such crimes have caused an estimated loss of ₹800 crore in the country this year. The amicus curiae expressed surprise that even educated people are falling into this trap, to which the CJI said that instead of being afraid of digital arrest on mobile, people should be aware.

According to a Hindustan Times report dated October 23, more than 21,900 complaints of 'digital arrest' fraud worth over ₹647 crore were registered in the first eight months of 2026. These figures were part of the status report filed in the Supreme Court by the Indian Cyber Crime Coordination Centre (I4C) and the Ministry of Home Affairs (MHA).

The Supreme Court has spoken about taking strict action regarding the accountability of banks and the problem of 'mule accounts' used for illegal money transfers. Mule accounts are bank accounts used to receive or transfer money obtained through illegal activities, including cybercrime. Earlier, in the month of August, the Supreme Court directed the RBI to prepare a framework and Standard Operating Procedure (SOP) for banks dealing with mule accounts and cyber-enabled financial fraud.

The court has directed the RBI to submit a list of all authorized financial institutions until the next order. The court will review the RBI's proposed 'KYC Amendment Guidelines 2026' to determine how effective the legal framework for compensation is in cases of failure to perform due diligence. The Attorney General sought more time to prepare the suggested SOP, which the court granted until November 30. Along with this, the RBI has been directed to make these guidelines operational by the end of the year.

Furthermore, the court also raised the issue of why the RBI is consulting with banks for security measures when some bank employees are themselves allegedly involved in the misuse of accounts. Information was also provided through WhatsApp that it has blocked 9,400 suspicious accounts so far. This decision by the Supreme Court could bring a major change in the protection of customers in India's digital financial infrastructure, as banks will now be mandated to strengthen their fraud detection and monitoring systems.