The Reserve Bank of India has issued new customer protection rules for Local Area Banks (LABs) covering digital banking fraud. These directions, effective January 1, 2027, set clear guidelines on liability, alerts, and compensation for fraudulent electronic banking transactions. Customers of LABs will, therefore, gain stronger safeguards against unauthorised digital payments.
Key Details of the LAB Digital Banking Fraud Rules
The RBI now defines three liability scenarios for fraudulent electronic banking transactions. First, if the LAB is negligent, the customer bears zero liability. Second, in a third-party breach, customers also face zero liability — provided they report the fraud within five calendar days. However, if customer negligence caused the loss, partial liability may apply.
LABs must send instant SMS alerts for all transactions above ₹500. Additionally, email alerts are mandatory wherever customers have registered an address. Banks must also offer 24×7 reporting channels, including a dedicated toll-free helpline, for customers to flag fraud immediately.
On receiving a complaint, an LAB must act promptly to stop further unauthorised transactions. The bank must resolve domestic fraud complaints within 45 calendar days. For cross-border cases, the deadline extends to 60 calendar days. Meanwhile, credit card fraud complaints trigger a mandatory shadow reversal within five calendar days.
Compensation for Small Value Digital Banking Fraud Losses
A key benefit under the new directions is compensation for individual victims of digital banking fraud. Eligible customers who lose up to ₹50,000 due to their own negligence can claim 85% of the net loss, or ₹25,000, whichever is lower. This compensation is available once in a lifetime.
The RBI will fund 65% of the compensation amount. The customer’s bank and the beneficiary bank share the remaining 35% for domestic cases. As a result, banks now have a direct financial incentive to prevent fraud on their platforms.
To claim compensation, customers must report the fraud on the National Cyber Crime Portal or Helpline (1930) and to their LAB within five days. The bank must then pay the compensation within five calendar days of receiving the application. Importantly, the burden of proving customer liability rests entirely on the LAB, not the customer.
These new rules represent a significant step in protecting LAB customers from the growing threat of online payment fraud. For full details, refer to the official RBI notification.
Source: RBI Notifications
