Banks must repay digital fraud victims when due diligence fails, Supreme Court says

The Supreme Court on Thursday signalled that banks and other financial institutions will be expected to make good the losses of cyber fraud victims when the fraud succeeds because the institution failed to carry out proper checks.

A bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and V Mohana said that in such cases, victims of offences like the so-called digital arrest scam should be compensated at least to the extent of the money they lost.

What the court said

The bench questioned why banks cannot immediately flag and examine transactions that sharply depart from a customer's normal pattern, and stressed that reporting a fraud after the money has gone is not enough. It reiterated measures such as holding back unusual transactions and automatically reporting suspicious activity, and indicated that institutions which fall short on due diligence could be asked to reimburse customers.

Chief Justice Surya Kant expressed surprise that people continue to fall for these scams despite repeated awareness campaigns and court orders, asking how anyone could be arrested over a mobile phone. He noted that such frauds have cost the country close to Rs 800 crore this year, according to reports of the hearing.

Attorney General R Venkataramani, appearing for the Centre, told the court that fixing bank liability and framing rules on it falls within the Reserve Bank of India's domain.

RBI's draft KYC rules under scrutiny

The court said it will examine the RBI's proposed Know Your Customer (KYC) Amendment Directions, 2026, which are expected to be notified by November 30 and come into force by December 31. The bench said the framework should provide suitable compensation where institutions fail in their due diligence duties.

The RBI has been asked to place before the court a list of all authorised financial institutions by the next hearing. The bench indicated that it could issue directions applying to all such institutions without making each bank a party to the case.

Why it matters

In a digital arrest scam, fraudsters pose as police, customs or investigating officers on video calls and pressure victims into transferring money to avoid a fake arrest. Mule bank accounts are central to moving these funds, which is why the court has focused on bank accountability. If the court's approach is built into RBI rules, customers who lose money because a lender ignored clear warning signs could have a firmer route to recovering it.

Readers should remember that no genuine police or government agency arrests or questions people over a video call, or asks for money to be transferred for verification. Suspected fraud can be reported on the national cyber crime helpline 1930.