RBI Proposes Targeted System for Handling Cyber Fraud

The Reserve Bank of India (RBI) has proposed a new framework for handling suspicious transactions linked to cyber fraud or money-mule accounts. This framework aims to protect customers from the hardship caused when their bank accounts are frozen over one disputed transaction.

Under the proposed system, banks would freeze only the disputed amount instead of blocking the customer's entire account. The draft rules are expected to take effect from April 1, 2027, though banks may implement them earlier.

The RBI has invited public comments on the proposed changes to its Know Your Customer Directions, 2025. The proposal includes the deployment of artificial intelligence-based monitoring systems to detect unusual transfers of Rs 1,000 or more. These systems will flag transactions that appear sudden, are inconsistent with a customer's declared profile, or have links to known cyber-fraud networks.

Once a hold is placed, the customer will get 20 calendar days to prove that the transaction is legitimate. The account holder may submit identity proof, explain the purpose and circumstances of the transfer, and provide documents establishing the source of funds. Banks must examine the customer's response and documents within 10 calendar days.

If the explanation is satisfactory, the temporary hold must be removed immediately. However, if the customer does not respond within the 20-day period, or the evidence fails to address the bank's concerns, the case must be referred to the jurisdictional police through the NCRP/CFCFRMS portal.

Law-enforcement authorities will then have 30 days from the referral date to issue a statutory restraint order. Without such an order, banks cannot continue holding the disputed funds indefinitely.

The framework follows the Supreme Court's August 4, 2026, direction asking the RBI to prescribe and circulate a standard operating procedure for temporary debit holds involving suspected mule activity and cyber-enabled fraud.

This new system is expected to provide relief to customers who have been affected by cyber fraud. It will allow access to undisputed funds while the flagged amount remains temporarily unavailable.

The RBI's proposal is a step towards protecting customers from cyber fraud and ensuring that their accounts are not unnecessarily frozen. The deployment of AI-based monitoring systems will help detect suspicious transactions and prevent cyber fraud.

The proposed framework is a significant development in the fight against cyber fraud. It is expected to provide a more efficient and effective way of handling suspicious transactions and protecting customers.

In conclusion, the RBI's proposal for a targeted system for handling cyber fraud is a welcome move. It is expected to provide relief to customers and help prevent cyber fraud. The proposed framework is a significant development in the fight against cyber fraud and is expected to have a positive impact on the banking sector.