RBI’s One-Time Fraud Relief Plan

The Reserve Bank of India (RBI) has proposed what could become one of its most citizen-centric financial protection measures: a framework to compensate victims of small-value digital frauds. Announced by Governor Sanjay Malhotra after the Monetary Policy Committee meeting on February 6, the scheme comes against the backdrop of a sharp rise in cyber fraud complaints — 24.03 lakh in 2025, a 25% increase over the previous year, according to data shared by the Ministry of Home Affairs.

The move signals an acknowledgment that while digital payments have deepened financial inclusion, they have also exposed millions to cyber vulnerabilities.

Key Features of the Proposed Framework

Although detailed guidelines are awaited, the broad contours indicate:

1. Compensation Cap: The payout will be capped at ₹25,000 or 85% of the fraud value, whichever is lower. Victims must bear at least 15% of the loss.
2. Cost Sharing: The RBI will bear 70% of the compensation, while banks will contribute 15%.
3. OTP Sharing Covered: Even cases where victims shared their One-Time Password (OTP) — typically considered user negligence — may qualify.
4. One-Time, Lifetime Benefit: The compensation will be available only once per individual.

The inclusion of OTP-sharing cases marks a significant shift from current practice, where customers who disclose such credentials typically forfeit claims.

Why Small-Value Frauds Matter

Large frauds dominate headlines, but small-value frauds are numerically overwhelming. According to RBI Deputy Governor Swaminathan J:

• Small-value frauds account for over two-thirds of fraud cases.
• They represent less than 15% of the total fraud amount in rupee terms.

This explains the logic of capping compensation at ₹25,000: it provides relief to a large number of victims while containing fiscal exposure.

The RBI’s annual report for 2024-25 recorded 13,516 card and internet fraud cases involving ₹520 crore for transactions above ₹1 lakh — a decline from the previous year. However, small-value frauds, particularly through the Unified Payments Interface (UPI), are on the rise.

UPI Frauds: The Emerging Vulnerability

UPI has revolutionised India’s payment ecosystem, but its scale has also attracted fraudsters.

• In 2024-25, 12.64 lakh UPI fraud cases involving ₹981 crore were reported.
• In the first eight months of 2025-26 alone, 10.64 lakh cases worth ₹805 crore were recorded.
• If trends continue, 2025-26 may see nearly 16 lakh cases exceeding ₹1,200 crore.

Across all payment-related frauds (including cards and prepaid instruments), cases surged 42% in 2023-24 to 28.22 lakh, with the total amount rising 74% to ₹4,403 crore. The average fraud value has also increased steadily — from ₹12,723 in 2022-23 to ₹17,769 in 2024-25.

Recovery rates remain dismal. In 2023-24, only ₹139 crore was recovered out of ₹1,457 crore in large-value card and internet frauds. This underlines the importance of timely compensation.

Balancing Consumer Protection and Moral Hazard

The “no questions asked” design aims to reduce litigation and procedural delays. However, the one-time lifetime limit reflects concern over moral hazard — the risk that repeated compensation may reduce vigilance.

The 15% mandatory loss-sharing ensures that:

• Victims retain some financial stake in cautious behaviour.
• The scheme does not incentivise reckless digital practices.
• Banks and customers share responsibility.

This calibrated approach seeks to protect consumers without undermining financial discipline.

Funding the Scheme: Fiscal Questions

Two unresolved issues stand out:

1. Retrospective Coverage: Will past fraud victims qualify, or only cases after implementation?
2. Funding Source: How will compensation be financed?

The RBI’s financial position is strong — with total income of ₹3.38 lakh crore in 2024-25 and a dividend transfer of ₹2.69 lakh crore to the government. Officials have suggested that the Depositor Education and Awareness Fund could be tapped, though clarity is awaited.

While a few thousand crores may be manageable for the central bank, sustained fraud escalation could strain resources if not accompanied by preventive measures.

Implications for India’s Digital Economy

India’s rapid shift toward digital payments has expanded inclusion but increased exposure to cybercrime. A compensation framework enhances trust in the digital ecosystem — crucial for sustaining adoption.

However, long-term resilience requires:

• Strengthened cybersecurity protocols.
• Improved fraud detection systems.
• Greater public awareness campaigns.
• Faster grievance redress mechanisms.

Compensation addresses the aftermath of fraud; prevention remains equally critical.

What to Note for Prelims?

• The regulates banking and payment systems.
• UPI is a real-time payment system enabling inter-bank transactions.
• The Depositor Education and Awareness Fund is maintained by the RBI.
• Small-value frauds form the majority of cases but a smaller share of total value.

What to Note for Mains?

• Evaluate the effectiveness of one-time compensation schemes in digital financial protection.
• Discuss the balance between consumer protection and moral hazard in financial regulation.
• Analyse the challenges of regulating cyber fraud in an expanding digital payments ecosystem.
• Link to GS Paper III (Banking, financial inclusion, cybersecurity).