Hit by digital fraud? RBI proposes Rs 25,000 compensation for small-value losses

Reserve Bank of India Governor Sanjay Malhotra on February 6 unveiled a new consumer safeguard designed to cushion customers from the impact of small-value online frauds, reinforcing the central bank’s focus on safer digital payments and stronger trust in the financial system. The proposed framework allows eligible customers to receive compensation of up to ₹25,000 for losses arising from specified fraudulent digital transactions, subject to defined eligibility criteria.

During the February MPC meeting, Governor Malhotra said the central bank is in the process of introducing a formal mechanism to compensate customers for losses arising from fraudulent online transactions. “Introducing a framework to compensate customers up to an amount of ₹25,000 for losses incurred in fraudulent transactions,” he said, highlighting that the move is intended to address the growing number of digital fraud cases affecting retail users.

The governor pointed out that while the monetary value of most digital frauds may be relatively small, their frequency is high. According to RBI’s assessment, a majority of reported digital fraud cases involve amounts below ₹55,000. “There is a framework which we will be taking out for compensation of small frauds because we have observed that while in value they constitute a small proportion, in terms of numbers nearly 65 per cent of fraud cases are for amounts less than ₹55,000,” Malhotra said during the post-Monetary Policy Committee (MPC) press briefing.

What has been proposed

Under the proposed framework, the compensation will be capped at Rs 25,000 or 85 per cent of the total fraud amount, whichever is lower, provided the transaction is not found to be mala fide. Importantly, the governor clarified that customers may still be eligible for compensation even in cases where a one-time password (OTP) has been shared, signalling a more consumer-friendly approach compared with earlier norms that often placed greater liability on users.

The compensation proposal was one of several measures announced by the RBI as part of a wider strategy to enhance customer protection and improve the safety of digital payments. While announcing the last bi-monthly monetary policy of the current financial year, Malhotra said the central bank will also release a discussion paper on measures to strengthen digital payment security. These may include mechanisms such as “lagged credits” and additional authentication requirements for specific categories of users, including senior citizens, who are considered more vulnerable to digital fraud.

Customer protection

Alongside the compensation framework, the RBI will issue three sets of draft guidelines focused on customer protection. These will cover mis-selling of financial products, recovery of loans and the conduct of recovery agents, and limiting customer liability in cases of unauthorised electronic banking transactions.

On mis-selling, Malhotra noted that the practice of selling unsuitable financial products or services—particularly third-party offerings -- can have serious consequences for both customers and regulated entities. He said there is a clear need to ensure that products and services sold at bank counters are appropriate to the customer’s needs and aligned with their risk appetite. The RBI plans to introduce draft guidelines to address these concerns and curb mis-selling practices across regulated entities.

The central bank will also shortly issue draft guidelines on customer liability in cases of unauthorised electronic banking transactions. These guidelines are expected to reassess and strengthen the existing framework governing customer responsibility in digital fraud cases, with a view to providing clearer protections and reducing ambiguity around liability.

In addition, Malhotra announced that the RBI will review and harmonise instructions related to the engagement of recovery agents and loan recovery practices. At present, different categories of regulated entities follow different sets of instructions on the use of recovery agents and conduct-related aspects of loan recovery. “It has now been decided to review and harmonise all the extant conduct-related instructions on engagement of recovery agents and other aspects related to recovery of loans,” he said.

Draft instructions on this front will be issued shortly for public consultation, allowing stakeholders to provide feedback before the rules are finalised.