New Delhi: The Supreme Court on Thursday said banks and other financial institutions must compensate victims of digital arrest and cyber fraud with an amount not less than their losses if an investigation establishes that the fraud occurred because the institution failed to exercise due diligence.
A Bench comprising Chief Justice of India Surya Kant and Justices Joymalya Bagchi and V. Mohana stressed that banks must be held accountable for preventing suspicious transactions instead of merely reporting fraud after the money has been transferred. The Court was hearing a suo motu case concerning digital arrest scams and the need to strengthen safeguards for victims.
The Court said the proposed regulatory measures of the Reserve Bank of India (RBI) must provide for compensation of at least the amount lost by customers when a failure of due diligence by a financial institution is established.
Supreme Court Seeks Stronger Accountability for BanksDuring the hearing, the Bench emphasised that banks have information about their customers, their account balances and their usual transaction patterns. It questioned why financial institutions could not temporarily stop unusual transactions and verify their authenticity before allowing money to be transferred.
The Court stressed that preventive action was essential to protect people from cybercriminals who impersonate police officers, CBI officials, Enforcement Directorate personnel and judicial authorities to threaten victims with arrest.
It also underlined the need for a system in which suspicious transactions trigger timely intervention by banks and the relevant authorities.
RBI Asked to Finalise New KYC DirectionsThe Supreme Court said it would examine the proposed RBI (Know Your Customer) Amendment Directions, 2026, before issuing further directions. The proposed rules are expected to be notified by November 30 and operationalised by December 31, 2026.
The Bench also asked the RBI to submit a list of all authorised financial institutions so that directions could apply across the banking sector without requiring each bank to be individually added to the proceedings.
The proposed safeguards include temporarily suspending transactions that deviate significantly from a customer’s established pattern, automatically alerting the relevant police station and conducting physical verification to establish whether a transaction is genuine.
Court Stresses Prevention of Digital Arrest ScamsThe Bench expressed concern that digital arrest scams continue despite awareness campaigns and previous judicial interventions. Chief Justice Surya Kant stressed that authorities must focus on preventing fraud rather than investigating it only after victims have lost their money.
In these scams, criminals impersonate law enforcement officers or government officials and use threats of arrest, fabricated legal documents and video calls to pressure victims into transferring money to accounts controlled by fraudsters.
The Supreme Court has been monitoring the issue since a senior citizen couple from Haryana approached it after allegedly losing ₹1.055 crore in a digital arrest scam. The fraudsters reportedly impersonated officials and used forged court documents to threaten the couple.
Earlier Directions to Strengthen Cyber Fraud ResponseIn August 2026, the Supreme Court directed the RBI to establish a standard operating procedure for banks dealing with accounts linked to cyber fraud and money laundering. It also called for stronger grievance redressal and money-restoration mechanisms to help victims recover defrauded funds.
The latest observations add to the Court’s efforts to establish greater accountability for financial institutions and improve safeguards against digital fraud. However, the proposed compensation framework is linked to the forthcoming RBI regulatory measures and the Court’s further consideration of the matter.
The proposed framework could strengthen protection for customers, particularly where banks fail to identify suspicious transactions or meet their due diligence obligations.