RBI to issue new rules for banks to compensate customers in case of fraud

Reserve Bank of India governor Sanjay Malhotra on Friday announced a series of regulatory initiatives aimed at strengthening consumer protection and tightening oversight of banks and non-banking financial companies (NBFCs), with a special focus on fraud compensation, mis-selling of financial products and loan recovery practices.

Addressing the media, Malhotra said the RBI is in the process of framing new rules on compensation for bank customers affected by small-value fraudulent transactions. He noted that the existing guidelines, issued in 2017, govern customer liability in cases of unauthorised electronic banking transactions, laying down conditions under which customers face zero or limited liability.

“Given the rapid adoption of technology in banking and payment systems since then, these instructions have been reviewed,” the governor said. He added that the draft revised guidelines, which will include a formal compensation framework for small-value frauds, will be issued shortly for public consultation.

In a parallel move to curb unfair practices, Malhotra said the RBI is also tightening norms to prevent mis-selling of financial products and services by banks and NBFCs. Mis-selling, he warned, carries serious consequences not only for customers but also for financial institutions.

“There is a clear need to ensure that third-party products and services sold at bank counters are suitable for customers and aligned with their risk appetite,” he said. To address this, the RBI has decided to issue comprehensive instructions covering advertising, marketing and sales practices of regulated entities. Draft norms on this front will also be placed in the public domain for feedback.

The governor further announced that the central bank will review and harmonise existing conduct-related instructions on loan recovery, including the engagement of recovery agents. At present, different rules apply to different categories of regulated entities, such as banks and NBFCs, leading to inconsistencies in recovery practices.

“To bring uniformity and strengthen borrower protection, the RBI will issue draft instructions after reviewing all existing guidelines,” Malhotra said, adding that these too will be opened up for public consultation.

The proposed measures underscore the RBI’s push to modernise its regulatory framework in step with evolving banking practices, while reinforcing safeguards for consumers across the financial system.

With IANS inputs