What Is Your Liability in a Credit Card Fraud?

You take utmost care while using your credit card. You have never shared payment details with anyone. Despite exercising a lot of care, it may well happen that you may be at receiving end of a credit card fraud. What do you do in such a case? More importantly, what is your liability? Do you have to pay for all the fraudulent transactions? Or is there a cap on your liability as a customer?

RBI has come out with draft circular on August 21, 2016 specifying the extent of customer liability in case of any banking fraud. This includes credit card frauds too. In this post, I will discuss these guidelines and how it limits liability of a customer in case of a fraud. 

A fraud can happen due to one of the following three reasons.

  1. Your negligence
  2. Negligence/fraud on the part of the bank
  3. Third party breach or fraud (neither you nor the bank is at fault)

Your liability depends on the cause/reason behind the fraud.

What Happens in Case of Negligence by the Customer?

You share your card details with someone or you lose your card but do not care to report it to the bank. Or you use your credit card to make a purchase on an obscure non-trustworthy website. In such a case, you must bear the entire loss (and rightfully so) till such time you report the fraudulent transaction to the bank. Once the transaction is reported to the bank, the bank will have to bear loss due to any subsequent fraudulent transaction. You may ask who decides if the fraud happened due to your negligence. RBI has put the onus on the bank to prove your negligence. If the bank can’t establish this with a limited time frame (as per bank policy), it needs to foot the bill.

What Happens in Case of Negligence/Fraud by the Bank?

In case of fraud/negligence on part of the bank (irrespective of whether the fraudulent transaction is reported by the customer or not), your liability is NIL. The bank has to bear the entire loss.

What Happens in Case of Third Party Breach?

Depends on how soon you report the transaction to the bank. Your timer starts from the moment you receive communication (SMS/e-mail/statement) about the transaction from the bank. When you notify the bank:

  • Within 3 days: Your liability is NIL.
  • Within 4-7 days: Your liability is capped at Rs 5,000.
  • After 7 days: Amount to determined based upon board approved policy

By the way, it is your responsibility to identify that the transaction is fraudulent. Why else will you report? Therefore, pay attention to communication about transaction from the bank. Remember there is no liability if you report the fraudulent transaction within 3 days to the bank.

Who Shares the Burden of Proof?

This aspect is quite important. Before anything, culprit behind this transaction needs to be established. Banks will always try to establish that the fault is at customer’s end because customer’s liability is NIL or quite limited otherwise. Banks have limited recourse in case of own negligence or third party fraud. It is not difficult to see that this can get quite subjective. The good part is that the onus is on the bank to prove that it was customer’s negligence that caused the fraud. The board approved policy should also specify the maximum time period to establish customer negligence. If the bank fails to do so, it will have to compensate the customer. 

Well, this looks extremely customer friendly. But we all know how banks and insurance companies rely on flimsy rules or evidence for almost everything. A bank can still attribute your fault and you will have to fight it out. Hence, do not exercise any lesser caution while using your credit card and think these RBI guidelines will save you.

How Long Does It Take for Reversal of Transaction?

If it is a case where customer liability is zero or limited, the transaction shall be reversed within 10 days of reporting. Banks may also choose to waive off customer liability (even in cases of customer negligence). Well, you don’t expect banks to show any compassion, do you? Moreover, bank must ensure that you do not lose out on any interest in case of debit card/bank account transaction or bear any additional burden of interest in case of credit cards.

What Should You Do When You Encounter a Fraudulent Transaction?

  1. Call up the bank to intimate about the fraudulent transaction and get the card blocked. (RBI circular does not mention anything about blocking the card). You can also report loss or theft of card, if that’s the case. By the way, you have to mandatorily register for alerts for electronic transactions.
  2. Drop an e-mail to the bank to keep record of the communication. You know banks can’t be trusted. The circular also mentions that the bank must send automatic acknowledgement to such requests with a complaint number.
  3. Do a regular follow up.

The intent of regulator is almost always right but the intent needs to be backed up by proper execution. Only time will tell if the bank follow these guidelines (once the guidelines are finalized) in the right spirit.


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