RBI Introduces Landmark Compensation Scheme for Cyber Fraud Victims
The Reserve Bank of India has announced a groundbreaking initiative to provide financial relief to victims of cyber fraud, marking a significant shift in consumer protection within the banking sector. This scheme represents one of the most citizen-centric measures introduced by the central bank in recent years.
Understanding the Compensation Framework
During the Monetary Policy Committee meeting on February 6, RBI Governor Sanjay Malhotra outlined the broad contours of this novel framework. The compensation scheme is designed specifically for small-value fraudulent transactions, with several key parameters already established.
- Compensation Cap: The total compensation will be limited to Rs 25,000 or 85% of the fraud amount, whichever is lower. This means victims will bear at least 15% of their losses.
- Funding Structure: The RBI will contribute 70% of the compensation amount, while banks will provide the remaining 15%.
- OTP Protection: Remarkably, the framework extends coverage even to cases where victims inadvertently shared their One-Time Password with fraudsters, a scenario that previously offered almost no recourse for recovery.
- One-Time Benefit: The scheme operates on a "no questions asked" basis but is strictly a one-time measure per individual, intended to encourage greater vigilance after an initial incident.
The Rising Tide of Cyber Fraud in India
The urgency behind this initiative becomes clear when examining the alarming statistics on financial fraud in the country. According to the Ministry of Home Affairs, financial fraud complaints on the National Cyber Crime Reporting Portal surged by 25% in 2025, reaching 24.03 lakh cases.
RBI's own data reveals that 13,516 cases of card and internet frauds were reported in the banking sector during 2024-25, involving Rs 520 crore. While this represents a decline from the previous year's 29,082 cases worth Rs 1,457 crore, these figures only account for frauds exceeding Rs 1 lakh.
Focus on Small-Value Fraud Patterns
Deputy Governor Swaminathan J highlighted that small-value frauds constitute more than two-thirds of all fraud incidents while representing less than 15% of the total monetary value. Governor Malhotra further noted that 65% of frauds involve amounts smaller than Rs 50,000, making the Rs 25,000 compensation cap particularly relevant.
The Unified Payments Interface has emerged as a major channel for such frauds. In 2024-25, there were 12.64 lakh UPI fraud incidents worth Rs 981 crore. Projections for 2025-26 suggest these numbers could rise to nearly 16 lakh cases involving over Rs 1,200 crore.
When considering all payment-related frauds reported by banks and non-bank issuers, the numbers are even more staggering. Cases surged 42% in 2023-24 to 28.22 lakh, with the total amount involved increasing by 74% to Rs 4,403 crore.
Rationale Behind the Compensation Approach
The RBI's decision to implement this scheme stems from several critical factors. First, the average size of payment frauds has been steadily increasing from Rs 12,723 in 2022-23 to Rs 17,769 in 2024-25, making the Rs 25,000 limit increasingly appropriate.
Second, recovery rates for fraud victims remain dismally low. In 2023-24, only Rs 139 crore was recovered from card and internet banking frauds totaling Rs 1,457 crore, representing less than 10% recovery.
Governor Malhotra explained the philosophical underpinning of the one-time compensation approach: "We want that after making a mistake once, the customer becomes alert and rectifies his mistake. A mistake can be forgiven once and that mistake can be reimbursed."
Unresolved Questions and Implementation Challenges
While the broad outline is promising, several crucial details remain unclear. Two significant questions dominate discussions about the scheme's implementation:
- Retrospective Application: Will the framework apply to past fraud incidents or only to those occurring after the guidelines are formally established?
- Funding Mechanism: Where exactly will the RBI source the compensation funds? Officials have suggested the Depositor Education and Awareness Fund as a potential source, but formal confirmation is pending.
Financially, the RBI possesses substantial resources, with total income of Rs 3.38 lakh crore in 2024-25 and a dividend transfer of Rs 2.69 lakh crore to the central government. However, establishing a sustainable funding model for potentially thousands of compensation claims remains a critical implementation challenge.
A Paradigm Shift in Consumer Protection
This compensation framework represents a fundamental shift in how financial institutions approach consumer protection in the digital age. By acknowledging that even cautious individuals can fall victim to sophisticated scams, the RBI is setting a new standard for accountability in the banking sector.
The scheme's success will ultimately depend on clear implementation guidelines, efficient processing mechanisms, and continued efforts to enhance cybersecurity infrastructure across India's financial ecosystem.
