RBI Unveils Major Consumer Protection Overhaul with Digital Fraud Compensation
The Reserve Bank of India (RBI) is taking decisive steps to fortify consumer protection in the financial sector, with a landmark proposal to compensate customers for losses incurred through small-value digital frauds. This initiative forms part of a comprehensive review of consumer protection rules, addressing escalating risks from cyber fraud, mis-selling of financial products, and aggressive loan recovery practices.
Compensation Framework for Digital Fraud Victims
Under the proposed framework, customers who fall victim to digital frauds will be eligible for compensation of up to Rs 25,000. Specifically, the payout will cover 85% of the loss amount or Rs 25,000, whichever is lower. This compensation is designed as a once-in-a-lifetime benefit, extending to individuals who have suffered financial losses, including those who have inadvertently shared one-time passwords (OTPs) with fraudsters.
RBI Governor Sanjay Malhotra emphasized that the central bank has thoroughly reviewed its 2017 framework on limiting customer liability in unauthorized electronic banking transactions. This reassessment was prompted by the rapid technological adoption in banking and payment systems over recent years. "Accordingly, the draft revised instructions, including a framework for compensation in case of small value fraudulent transactions, shall be issued shortly for public consultation," Malhotra stated.
Shared Responsibility in Fraud Cases
Governor Malhotra elaborated on the rationale behind the compensation model, noting that while customers should ideally learn from the mistakes of others, the RBI recognizes the plight of first-time victims. In such instances, the central bank has decided to compensate 70% of the loss amount. The remaining 30% will be equally shared between the bank and the customer, fostering a sense of shared responsibility and encouraging vigilance among all parties.
Curbing Mis-Selling of Financial Products
Parallel to addressing digital frauds, the RBI is intensifying efforts to curb the mis-selling of financial products by regulated entities. Malhotra highlighted that mis-selling carries "significant consequences for both customers as well as the regulated entity." He stressed the urgent need to ensure that third-party products and services sold at bank counters are suitable for customer needs and align with individual risk appetites.
To tackle this issue, the RBI plans to issue comprehensive instructions covering advertising, marketing, and sales of financial products and services. "The draft instructions in this regard shall be issued shortly for public consultation," the governor confirmed, underscoring the commitment to transparency and stakeholder input.
Harmonizing Loan Recovery Practices
In another critical move, the central bank will review and harmonize rules governing loan recovery and the engagement of recovery agents. This area has been a frequent source of customer complaints, with different categories of regulated entities currently following disparate conduct-related instructions.
"It has now been decided to review and harmonise all the extant conduct-related instructions on engagement of recovery agents and other aspects related to recovery of loans," Malhotra announced. Draft norms will be released for public feedback, aiming to standardize practices and enhance fairness in loan recovery processes.
These proposed measures collectively represent a robust response to evolving challenges in the financial landscape, prioritizing consumer protection and fostering a more secure and equitable banking environment for all stakeholders.
