The Supreme Court has indicated that banks may be required to compensate victims of digital arrest and other cyber frauds where losses occur because financial institutions fail to exercise due diligence, as the Court pressed for stronger preventive safeguards against suspicious transactions.
A bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi and Justice V Mohana was hearing a suo motu matter concerning digital arrest scams. During the proceedings, Senior Advocate NS Nappinai, appearing as amicus curiae, told the Court that such scams continue despite awareness campaigns and ongoing interventions, citing a recent case in which a woman lost ₹2.5 crore.
The Chief Justice expressed concern that educated citizens continue to fall victim to such frauds despite repeated public warnings and media coverage. He questioned why victims believe they can be “arrested” over a mobile phone and said people should verify purported court orders on official court websites.
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Court Focuses on Preventing Suspicious Transactions
The Court questioned why banks and other agencies are not able to stop unusual transactions before money is transferred to fraudsters.
Attorney General R Venkataramani told the bench that banks are now better at flagging suspicious transactions than they were six months ago. He also said meetings had been held with the Reserve Bank of India to push rule-making and that the Indian Cyber Crime Coordination Centre is working continuously on the issue.
The Chief Justice, however, stressed that post-fraud reports were not enough and asked why suspicious transactions could not be temporarily withheld when they differed sharply from a customer’s normal transaction history.
The Court also asked whether banks could notify the local police and carry out verification before allowing such transactions to proceed.
The Attorney General said the liability of banking officers was being addressed and that a portal would be operationalised at the earliest. He also said action had been taken where bank officials were found to be involved in fraud.
Banks May Face Compensation Liability
The Chief Justice said the Court was considering directions under which banks could be made to compensate victims where digital arrest fraud occurred because of a failure to exercise due diligence.
“We are proposing to direct that wherever such fraud takes place, bank will compensate victim and suffer prosecution. It has to be done,” the CJI said.
The Attorney General opposed the idea of imposing liability directly through judicial directions and said the issue should be dealt with by the RBI through regulation.
Justice Bagchi observed that strict liability could be imposed on financial institutions and said the RBI, as regulator, would have to frame suitable guidelines.
The Chief Justice also questioned why banks should not be held accountable for customer losses when they already possess detailed transaction histories that can help identify unusual activity.
The Court indicated that suspicious transactions inconsistent with an account holder’s normal behaviour should be suspended until their genuineness is verified.
RBI Asked to Examine Compensation Framework
In its order, the Supreme Court noted that the Attorney General had submitted a note dated October 28 proposing certain directions on behalf of the Union government.
The bench said it would first examine the proposed Reserve Bank of India KYC Amendment Directions, 2026, which are expected to be notified by November 30 and operationalised in December.
The Court said the RBI’s proposed regulatory measures should require financial institutions to indemnify victims of digital arrest and other cyber frauds where losses result from a failure to exercise due diligence. The compensation, it said, should not be less than the amount lost by the victim.
The Court also emphasised preventive measures, including temporary suspension of unusual transactions, automatic notification to the relevant police station and physical verification to establish whether a transaction is genuine.
To ensure that the RBI’s proposed regulatory framework and the Court’s directions are implemented without delay, the bench directed the RBI to submit a list of all authorised financial institutions at the next hearing.
During the proceedings, the Chief Justice also observed that the net loss suffered by the Indian economy from such frauds this year was approximately ₹800 crore.
About the author — Suvedita Nath is a science student with a growing interest in cybercrime and digital safety. She writes on online activity, cyber threats, and technology-driven risks. Her work focuses on clarity, accuracy, and public awareness.
