India: RBI Limits Liability Of Customers In Unauthorised Electronic Banking Transactions

Last Updated: 25 July 2017
Article by Trilegal .

In order to strengthen digital transactions and address increasing customer complaints, the RBI has recently issued revised customer liability guidelines providing for a compensation mechanism to protect customers from unauthorised e-banking transactions.

Background

Electronic banking transactions have undergone an unprecedented growth spurt in India, especially after the Government's demonetization announcement in November 2016. It has been reported that there has been a year on year growth of 200%, 165% and 45% in mobile banking, debit cards and credit cards transaction amounts respectively. This spike in e-banking transactions has been accompanied by an increase in the number of unauthorized or fraudulent transactions.

Under the erstwhile regulations issued by Reserve Bank of India (RBI) on fraudulent transactions, banks had to compensate the customer if the banks were at fault. For third party faults, banks were required to compensate customers as per their customer relations policy. However, the extent of liability and the timelines for compensation were not specifically stipulated in these RBI regulations and customer claims were typically compensated after the banks' insurance claims were settled.

In a move to plug these gaps and to further bolster digital transactions, the RBI recently issued a circular providing revised guidelines which limit liability of customers in cases of unauthorised e-banking transactions (RBI Circular). The RBI Circular applies to all scheduled commercial banks, small finance banks and payment banks (together, the Banks) and addresses certain key issues in relation to unauthorised e-banking transactions:

(a) Systems and Procedures

The RBI Circular mandates the Banks to strengthen systems and procedures to ensure the safety of e-banking transactions. Some of these include having (i) a robust and dynamic fraud detection and prevention mechanism, (ii) a system to assess the risk from unauthorised transactions and resultant liabilities, (iii) measures to mitigate the risks and ensure protection from liabilities, and (iv) customer awareness. The RBI Circular also requires the Banks to have in their customer relations policy, a mechanism for compensation of customers in the event of unauthorised transactions. They are also obliged to implement a system to report cases of customer liability to their board of directors or board committees.

(b) Reporting of Unauthorised Transactions

The Banks are required to advise customers to report unauthorised e- banking transactions at the earliest and to take various measures to facilitate such communications, such as:

(i) providing 24x7 access to websites, phone banking, SMS, e-mail, IVR, dedicated toll-free helplines and home branches for reporting unauthorised transactions/loss/theft;

(ii) requiring customers to mandatorily register for alerts through SMS and email (where available);

(iii) denying e-transactions facilities other than ATM withdrawals to customers who do not provide mobile numbers;

(iv) providing a 'Reply' option to instantly respond to email and SMS alerts and a direct link on the home page for lodging complaints;

(v) recording the time and date of delivery of the message and the customers' response, to ascertain customer liability; and

(vi) responding to customer communication with receipt acknowledgment and the registered complaint number.

(c) Customer Liability

Zero Liability

The RBI Circular provides that customers will have zero liability for an unauthorised transaction which takes place due to:

(i) contributory fraud, negligence or deficiency on the part of the Bank, or

(ii) a third-party breach where the fault lies with neither the customer nor the Bank and the customer notifies the Bank within 3 working days of receiving communication from the Bank regarding the unauthorised transaction.

Limited Liability

The Circular also entitles customers to limited liability in the following cases:

(i) Customer negligence i.e. where the customer suffers loss due to his/her negligence, the customer must bear the entire loss until he/she reports the unauthorised transaction to the Bank. The Bank must however bear any loss which is incurred after that. The Banks may also, at their discretion, waive the liability of customers in such cases.

(ii) Third-party breach i.e. where the customer suffers loss due to a third-party breach and reports the transaction to the Bank within 4-7 working days after receiving communication from the Bank regarding the transaction.

In such cases, the customer's liability per transaction is limited to the lower of the transaction value or the amount mentioned below, in respect of the type of account involved (Specified Amount).

Type of Instrument

Specified Amount (INR)

Basic savings bank deposit account

5,000

Other savings bank accounts, prepaid payment instruments, gift cards, MSME accounts, accounts of individuals with annual average balance up to INR 2.5 million

10,000

other current/cash credit/overdraft accounts and credit cards with limit over INR 0.5 million

25,000

If the third-party breach is reported by the customers after 7 working days, the liability of the customer will be determined in accordance with the Bank's board approved policy, which must be informed to existing customers individually and displayed in the public domain.

(d) Settlement of Claims

The RBI Circular requires all the Banks to credit the amount involved in the unauthorised e-banking transaction to the customer's account within 10 working days of notification by the customer. Further, the Bank must resolve a customer complaint, determine the liability of a customer and compensate within 90 days from receipt of a complaint.

The Banks must ensure that a customer does not suffer any loss of interest where a debit card or bank account is concerned or incur any additional interest in the case of a credit card. The burden of proving customer liability for unauthorised transactions lies with the Banks.

A Move to Standardize Liability

The erstwhile regulations required banks to formulate their own policies for compensating customers in case of fraudulent transactions. While some banks had adopted customer friendly policies from the Code of Bank's Commitment to Customers, many banks had compensation policies where the bank's liability was limited to a paltry sum and in some cases to a specified number of breaches.

The RBI Circular therefore aims to boost customer confidence in e-banking by providing a uniform compensation mechanism which limits the liability of customers for every unauthorised transaction while relying on prompt reporting by customers. Further, the RBI vests responsibility for ensuring the security of e-banking transactions with the Banks and imposes liability on customers only if they are negligent or if they delay notifying the Banks of such unauthorized transactions.

The RBI Circular does not however address a crucial player in e-payment transactions i.e. non-bank prepaid payment instrument (PPI) issuers. PPI transactions have reportedly increased by 270 million year on year and a sizeable portion of e-transactions can be attributed to PPIs. Yet the RBI Circular is silent on fraudulent transactions using PPIs. The extant RBI policy guidelines governing PPIs merely require PPI issuers to put in place an adequate information and data security infrastructure, systems for prevention and detection of fraud and an effective mechanism for redressal of customer complaints and reporting fraud involving PPIs.

Notably, the RBI has recently released draft directions requiring PPI issuers to outline the amount and process of customer liability in case of unauthorised or fraudulent transactions involving PPIs, consistent with other customer liability limit instructions issued by the RBI. If these directions get notified, PPI issuers may also have to implement a customer liability framework in line with the RBI Circular.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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