Digital arrest: Supreme Court wants RBI rules making banks compensate victims

The Supreme Court of India has asked the Reserve Bank of India (RBI) to make banks compensate victims of "digital arrest" scams and other cyber frauds when weak safeguards at a bank helped the fraud succeed. At a hearing on Thursday, October 29, 2026, in a case it took up on its own, a bench headed by Chief Justice Surya Kant said the RBI's proposed rules on cyber fraud should make banks and other financial institutions liable for a customer's loss, with compensation of at least the amount lost, where investigations show negligence or poor due diligence on the institution's part.

A "digital arrest" is a scam, not a legal process. Fraudsters call or video-call a person while pretending to be police, CBI, customs or other officers, claim the person is linked to a crime such as money laundering or a suspicious parcel, and then keep the victim on camera for hours or days, cut off from family, until they transfer money to "verify" or "settle" the case. Indian law has no such thing as an arrest over a video call, and government agencies have repeatedly said so. Yet the scam has cost people, many of them older citizens and professionals, large sums.

Today, when such money leaves a victim's account, getting it back is slow and uncertain. The money usually passes quickly through "mule" accounts, bank accounts opened or rented in other people's names, before it is withdrawn or moved abroad. The court's suggestion shifts part of the burden onto the financial system: if a bank failed to spot obviously unusual transfers, or allowed mule accounts to be opened without proper checks, it would have to make good the loss rather than leave it with the customer.

For technology and fintech companies, this matters as much as for banks. Payment apps, digital lenders and new-age banks would face strong pressure to invest in fraud-detection tools, such as systems that flag large or unusual transfers in real time, delay suspicious payments, or check whether an account receiving money has been reported for fraud. Start-ups that build these tools could see more demand, while smaller firms may find compliance costs rising.

The Attorney General's position shows the debate ahead. The government prefers the RBI to write the rules, arguing that court-imposed penalties may not work in practice. The court, for its part, has signalled that whatever rules come must include real liability. The final shape will depend on the RBI's regulations and on further hearings; the court has not yet issued a final order.

Short-term: Banks and payment companies are likely to tighten checks on new accounts and on large, sudden transfers, which may mean more verification calls and occasional delays for genuine customers.

Long-term: If the RBI's rules include the liability the court wants, India would move closer to a system where the institution, not only the customer, carries the cost of preventable fraud. That could change how banks and fintech firms design their apps and onboarding.

Who is affected: Bank and UPI users, especially older people who are frequent targets; banks, payment apps and fintech start-ups; companies that make fraud-detection software; the RBI and police cyber cells.

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