Supreme Court says Banks Must Compensate for Fraudulent Transactions if Reported Within 3 Days

In a landmark ruling, the Supreme Court of India has declared that banks are liable to compensate customers for unauthorized and fraudulent online transactions, provided the victim lodges a complaint within three days, as stipulated by the Reserve Bank of India (RBI). This decision brings significant relief to account holders facing online fraud.

Court Holds Banks Responsible for Vigilance

The bench, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, emphasized the banks’ duty to prevent and address fraudulent activities. “The bank should remain vigilant. With advanced technology at their disposal, banks are well-equipped to detect and prevent such unauthorized transactions,” the court stated.

However, the court also cautioned customers to exercise vigilance. “Account holders must ensure that OTPs are not shared with third parties. In certain cases, negligence on the customer’s part could also lead to liability,” the bench added.

Compensation Ordered for SBI Customer

The Supreme Court upheld a directive requiring the State Bank of India (SBI) to compensate a customer, Pallab Bhowmick, with ₹94,204.80 for a fraudulent transaction. The order, issued on January 3 and uploaded on Monday, dismissed SBI’s appeal against the Gauhati High Court’s findings, which had ruled in favor of the customer

RBI Guidelines on Fraudulent Transactions

The court referred to Clause 8 of the RBI circular, which specifies that customers have “zero liability” for unauthorized electronic transactions if they report the fraud within three working days. The fraudulent transaction in this case was reported within one working day, aligning with RBI guidelines.

Clause 9 of the circular also allows banks to waive customer liability even if some negligence is attributed to the account holder.

Incident Details

Bhowmick, an SBI account holder from Guwahati, fell victim to fraud after purchasing garments online from Louis Philippe, a brand under the Aditya Birla Group. While attempting to return the items for a refund, he received a call from an individual posing as a customer care manager. The fraudster instructed him to download a mobile app to process a ₹4,000 refund. Upon installing the app, ₹94,204 was siphoned from his account.

The court noted that the fraudulent transaction stemmed from a breach in the customer database of Louis Philippe.

Implications for Banks and Customers

The Supreme Court’s ruling underscores the responsibility of banks to safeguard customer accounts against fraud while urging customers to remain cautious. This judgment reinforces the importance of timely reporting and adherence to RBI guidelines in cases of unauthorized transactions.