Pune: Supreme Court Holds Banks Liable For Fraudulent Withdrawals; Banks Must Compensate Customers For Fraud, Says Supreme Court

Pune, 21st February 2025: In a landmark verdict, the Supreme Court has ruled that banks are fully liable if money is fraudulently withdrawn from a customer’s account. The decision, delivered on 3rd January 2025 in the case of State Bank of India vs. Pallabh Bhowmik and Others, reinforces the accountability of financial institutions in safeguarding customer funds.

Banking expert Vidyadhar Anaskar emphasized that the ruling provides significant relief to account holders, affirming that banks cannot evade responsibility in cases of fraud. The verdict is expected to have a profound impact on banking operations and consumer protection in the financial sector.

The court based its decision on Section 5 of the Banking Regulation Act, Section 10 of the Reserve Bank of India Act, and the Consumer Protection Act of 2019. The ruling mandates that banks must fully compensate customers for fraudulent withdrawals and ensure strict security measures to prevent such incidents.

During the hearing, the account holder argued that the bank had failed to fulfill its obligations by not implementing adequate fraud prevention measures. It was also alleged that the bank violated the Consumer Protection Act by neglecting its duty to protect customer funds. In response, the bank contended that it bore no negligence and that the customer’s failure to act promptly had contributed to the fraud.

However, the Supreme Court firmly held that the safety of customer deposits is not just a courtesy but a fundamental responsibility of banks. The judgment stressed that financial institutions must establish robust security systems to prevent fraud and cannot shift the burden onto customers under any circumstances.

This decision sets a critical precedent for the banking industry, reinforcing consumer rights and highlighting the necessity for stringent cybersecurity measures. Anaskar noted that this ruling will enhance public trust in banks and encourage financial institutions to adopt more effective fraud prevention mechanisms.

With this verdict, banks are expected to implement immediate and comprehensive security upgrades to protect customer accounts, ensuring better compliance with consumer protection laws and regulatory requirements.