Cyber fraud victims to get compensation from banks if negligence is proved: Supreme Court

The Supreme Court has emphasised that banks and other financial institutions must compensate victims of cyber fraud, including digital arrest scams, if investigations establish that the fraud occurred because the institutions failed to exercise due diligence. The court has also sought stronger safeguards to prevent suspicious transactions and hold financial institutions accountable.

In its October 29 order, uploaded in November, a bench headed by Chief Justice of India Surya Kant, along with Justices Joymalya Bagchi and V Mohana, reiterated that the Reserve Bank of India (RBI) must incorporate mandatory compensation provisions into its proposed regulatory framework. The compensation should not be less than the amount lost by the customer if the institution's failure to prevent or report the fraud is established.

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The development marks a significant step towards strengthening consumer protection against increasingly sophisticated cybercrime. Under the proposed safeguards, banks may be required to temporarily suspend unusual transactions that deviate from an account holder's normal transaction history, alert the police about suspicious activity and conduct physical verification to establish whether a transaction is genuine.

The Supreme Court has also directed the RBI to submit a list of all authorised financial institutions. The bench said it would examine the central bank's proposed Know Your Customer (KYC) Amendment Directions, 2026, before allowing the regulatory process to proceed. The directions are expected to be notified by November 30 and operationalised by December 31.

The court has simultaneously asked WhatsApp and other digital intermediaries to outline measures to prevent digital arrest scams and related cybercrimes. These platforms must also submit their proposals to the Indian Cybercrime Coordination Centre (I4C).

During the proceedings, WhatsApp's counsel informed the court that the platform had acted against 9,400 accounts and was developing software to identify suspicious accounts and warn users.

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The scale of the problem remains significant. According to the court's observations reported by The New Indian Express, victims had lost around Rs 800 crore to cybercrime this year, despite a reported 50% decline in such offences.

Digital arrest scams typically involve fraudsters impersonating police officers or officials of agencies such as the Central Bureau of Investigation. They threaten victims with arrest, often through prolonged video calls, and pressure them into transferring money.