Strict Liability, With Teeth
The India Commentary view
View all posts by this Author
By Our Editorial Team
First publised on 2026-10-30 10:53:25
About the Author
The India Commentary view
View all posts by this Author
The Supreme Court has said what the RBI should have said long ago. A bank that fails in due diligence and thereby enables a digital arrest fraud must compensate the victim. The compensation must be no less than the amount lost. On October 29 the bench of Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice V. Mohana made a liability clause the condition for the RBI's proposed rules. The Court has warned that it will impose the clause by judicial order if the regulation omits it.
The reasoning is straightforward. The victim cannot see the pattern of the account that receives his money, or measure a withdrawal against years of behaviour. The bank can. The Chief Justice noted that banks hold full audit trails for long-standing customers and can use AI against them. Justice Bagchi asked why an institution whose weak systems allowed its services to be misused should be spared strict liability. There is no good answer. The party with the data and the tools must carry the risk of ignoring them.
The Court wants every financial institution to suspend transactions that depart sharply from an account's history, to inform the nearest police station automatically and to verify physically that the payment is genuine before releasing it. These steps ask a bank to do for its customer what a prudent branch manager once did across the counter. A pensioner who empties his account in a day should be asked a question before the money leaves.
The rulebook has a gap that the Court's order should close. As reported, the RBI's 2017 circular gives zero liability only for unauthorised transactions. A digital arrest victim is frightened into authorising the transfer himself. By the letter of that circular he is unprotected. The new regulation must say that a transfer procured by deception, where the bank missed the warning signs, is the bank's loss.
The Court is right to ask whether the rules have teeth. It has pointed to earlier RBI circulars whose implementation remains doubtful. It has questioned the practice of consulting banks before acting against them. It has insisted that liability fall on the institution and not only on the officer. A regulator that negotiates with those it regulates cannot deter them. The RBI should publish its standard, investigate each fraud, record a finding on due diligence and attach an automatic consequence.
Reports that bank staff have themselves been party to these scams deserve a serious answer. The Court has asked the RBI what action banks have taken against employees, and it should receive a full account. Complicity must be proved case by case. Where it is proved, prosecution must follow.
Prevention must also be fair to the honest customer. A bank made liable for frauds it misses will be tempted to freeze what looks unusual. The RBI's draft on mule accounts, as reported, allows holds of up to 60 days with no compensation for genuine payments wrongly held. That should be corrected. A wrongly frozen payment needs a remedy and a quick appeal. And the timetable must protect victims now. A rule that begins in April 2027 cannot be allowed to excuse the months before it. The Court has set the standard. The RBI must now write it so that banks fear breaking it.
