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Who bears the loss of fraudulent financial transactions?

We carry out various financial transactions through bank accounts, debit cards, credit cards, prepaid payment instruments (PPIs), e-wallets, etc. But what if there is an unauthorised / fraudulent financial transaction from the account / card / PPI? Who will bear the loss of unauthorised financial transactions? 

What if unauthorised transaction is due to customer’s negligence?

When the unauthorized financial transaction is due to the negligence of the customer (for eg. sharing password, PIN, OTP, etc), the customer is liable to bear the entire loss until he / she reports the unauthorized transaction to the bank / non-bank PPI issuer. At its discretion, bank / non-bank PPI issuer may waive off customer liability for the unauthorized transactions even in cases of customer negligence. 

Any loss occurring after the reporting of the unauthorized transaction must be borne by the bank / non-bank PPI issuer.

What if unauthorised transaction is due to bank’s / non-bank PPI issuer’s fault?

When the unauthorized financial transaction is due to the contributory fraud / negligence / deficiency on the part of the bank / non-bank PPI issuer (irrespective of whether the transaction is reported by the customer), there is zero liability of the customer, and the loss has to be borne by the bank / non-bank PPI issuer.

What if unauthorised transaction is due to third party breach?

When neither the customer nor the bank / non-bank PPI issuer is at fault and the unauthorized financial transaction is due to third party breach because of deficiency elsewhere in the system, the liability of the customer depends upon the time taken by him / her to report the unauthorized transaction to the bank / non-bank PPI issuer.

  • If the customer notifies the bank / non-bank PPI issuer within 3 working days of receiving the communication from the bank / non-bank PPI issuer regarding the unauthorized transaction, the liability of the customer is zero.
  • If there is a delay of 4 - 7 working days in notifying the bank / non-bank PPI issuer of such transaction, the per transaction liability of the customer is limited to the transaction value or the amount mentioned below, whichever is lower.
Type of Account Maximum liability (Rs.)
Basic Savings Bank Deposit Accounts (BSBDA) 5,000
All other savings bank accounts
Prepaid Payment Instruments and Gift Cards
Current / Cash Credit / Overdraft accounts of MSMEs
Current accounts / Cash Credit / Overdraft accounts of individuals with annual average balance (during 365 days preceding the incidence of fraud) / limit up to Rs.25 lakh
Credit cards with limit up to Rs.5 lakh
 10,000
All other Current / Cash Credit / Overdraft accounts
Credit cards with limit above Rs.5 lakh
 25,000

  • If the delay in reporting is beyond 7 working days, the customer liability is determined as per the bank’s / non-bank PPI issuer’s Board approved policy. 

What is bank’s / non-bank PPI issuer’s role after receiving report of unauthorized transaction?

On receiving a report / complaint from the customer regarding the unauthorized transaction, the bank / non-bank PPI issuer shall credit (notional reversal / shadow reversal) the amount involved in the unauthorized transaction to the customer’s account / PPI within 10 working days from the date of receipt of the complaint.

The bank / non-bank PPI issuer shall resolve the complaint and establish the liability of the customer, if any, within 90 days from the date of receipt of the complaint.

Where the bank / non-bank PPI issuer is unable to resolve the complaint or determine the customer liability, if any, within 90 days, the customer needs to be compensated. The final credit is to be given as on the date of the unauthorized transaction to ensure that there is no loss of interest for the customer in case of debit card / bank account, and the customer does not bear any additional burden of interest in case of credit card.

The burden of proving the customer liability in case of unauthorized transactions lies on the bank / non-bank PPI issuer.


References

Reserve Bank of India. (2017, July 06). 'Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions'. Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11040

Reserve Bank of India. (2021, August 27). 'Master Directions on Prepaid Payment Instruments (PPIs) (Updated as on November 12, 2021)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156


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