RBI proposes ₹25,000 compensation for small-value digital fraud victims

The Reserve Bank of India has proposed compensating customers for small-value digital frauds, even when OTPs are shared, as part of broader reforms aimed at strengthening consumer protection, safer payments and accountability in banking practices.

The Reserve Bank of India (RBI) has proposed a new customer protection framework that would allow victims of small-value digital frauds to receive compensation of up to Rs 25,000 per case. The move comes amid rising concerns over online frauds, most of which involve relatively modest transaction amounts but affect a large number of bank customers.

RBI Governor Sanjay Malhotra said nearly 65 per cent of reported fraud cases involve amounts below Rs 50,000, prompting the central bank to design a simplified, consumer-friendly compensation mechanism. Under the proposal, customers would be eligible for compensation even in cases where they have shared a one-time password (OTP), provided the loss was unintentional.

Malhotra explained that affected customers would be compensated either up to Rs 25,000 or 85 per cent of the loss amount, whichever is lower. Importantly, the benefit would be available on a “no questions asked” basis and could be availed only once in a lifetime. The RBI plans to release a detailed consultation paper to seek public and stakeholder feedback before finalising the framework.

Funding mechanism and loss-sharing model

Elaborating on the proposal, RBI officials said compensation would be drawn from the Deposit Education and Awareness Fund, which includes surplus income generated from unclaimed deposits. Deputy Governor Swaminathan J noted that the fund has accumulated adequate surplus over time, making it suitable for supporting such customer-centric initiatives.

In certain fraud cases, the RBI is also considering a shared liability model. Under this structure, the central bank would compensate 70 per cent of the loss, while the remaining 30 per cent would be shared between the customer and the bank, depending on the circumstances of the fraud.

Wider push for customer protection

Alongside the compensation proposal, the RBI announced plans to issue three separate draft guidelines for public consultation. These will focus on curbing mis-selling of financial products, strengthening norms around loan recovery practices, and clearly defining customer liability in unauthorised electronic transactions.

The central bank also intends to publish a discussion paper on enhancing digital payment security. Proposed measures may include delayed or “lagged” credits to allow transaction verification, as well as additional authentication safeguards for vulnerable user groups such as senior citizens.

Together, these initiatives signal a broader regulatory push by the RBI to improve trust, accountability and safety in India’s rapidly expanding digital banking and payments ecosystem.