Should banks bear liability for losses from coerced, customer-authorised transactions? Examine in light of recent Supreme Court interventions.

In "digital arrest" scams, fraudsters pose as police officers and coerce victims, most often senior citizens [1], into transferring money themselves. The RBI's 2017 zero-liability framework protects only unauthorised transactions [3]. As a result, the full loss from coerced-but-authorised transfers falls on the victim. Banks should share this liability where their own safeguards fail, not in every case.

Case for bank liability

• Mule accounts: the stolen money lands in accounts that banks opened. The Supreme Court allowed the CBI to probe bankers under the Prevention of Corruption Act, 1988 for opening such accounts [1].
• Information asymmetry: banks hold the transaction data. The Court asked the RBI why AI/ML is not being used to identify mule accounts and freeze proceeds [1]. MuleHunter.AI is live in only 26 banks [4].
• Least-cost avoider: the party that can prevent a loss most cheaply should bear it. That is often the bank, not a frightened pensioner.

Case against blanket liability

• Moral hazard: automatic refunds may make customers less careful and invite staged "coercion" claims.
• Cost pass-through: banks would recover these losses through higher charges on all customers.
• Genuine instruction: the customer did give the order, and banks cannot judge the intent behind every transfer.

Supreme Court interventions

• December 2025: the Court made the CBI the primary agency for digital arrest cases and made the RBI a party [1].
• August 2026: the Court directed the RBI to adopt, within four weeks, an SOP on temporary debit holds for mule-linked accounts, and to implement a lagged-credit safeguard and customer protection in electronic banking [2].
• Through continuing mandamus, the Court is monitoring the restoration of defrauded money. So far only ₹18.05 crore has been restored, across 36,290 cases [2].

Way forward

• RBI's draft revision (March 2026) offers compensation only for small-value frauds [4]. It should be extended to cover coerced transactions where due-diligence lapses are proven.
• Graded liability: the bank pays in full where its KYC or monitoring failed, with a capped share otherwise.
• MuleHunter in every bank, and callback checks before large, unusual transfers by elderly customers.

Coerced transactions show the gap between legal consent and real choice. A fault-based, shared-liability regime would compensate victims when bank safeguards fail while still keeping customers careful. That balances fairness against moral hazard, and it would give practical effect to the Court's call for a coordinated response that protects the dignity of vulnerable citizens under Article 21.