RBI Revamps Fraud Liability Rules for Urban Co-operative Banks: A Complete Guide to the 2026 Amendment Directions

The Reserve Bank of India has issued a sweeping overhaul of the customer protection framework applicable to Urban Co-operative Banks through the Reserve Bank of India (Urban Co-operative Banks – Responsible Business Conduct) Third Amendment Directions, 2026. Issued vide circular RBI/2026-27/172 DOR.MCS.REC.No.135/01-01-037/2026-27 dated June 24, 2026, these revised directions will govern all electronic banking transactions undertaken by UCB customers on or after January 1, 2027.

This comprehensive revision replaces the earlier provisions consolidated under the Reserve Bank of India (Urban Co-operative Banks — Responsible Business Conduct) Directions, 2025 and introduces an entirely restructured regime covering liability limits, fraud reporting obligations, compensation mechanisms, and Board-level monitoring requirements.

The Amendment Directions derive their authority from Sections 35A and 56 of the Banking Regulation Act, 1949, with the Reserve Bank being satisfied that issuance of these directions is necessary and expedient in public interest.

The revised framework applies exclusively to:

  • Urban Co-operative Banks (UCBs) operating across India
  • All electronic banking transactions (EBTs) executed by UCB customers
  • Transactions occurring on or after January 1, 2027

New Definitions Introduced

One of the most significant aspects of the Third Amendment Directions is the introduction of several critical definitions that form the bedrock of the revised liability and compensation framework.

Electronic Banking Transaction (EBT)

Inserted as paragraph 4(9D), the term Electronic Banking Transaction (EBT) carries the same meaning as electronic funds transfer defined under Section 2(c) of the Payment and Settlement Systems Act, 2007, and expressly encompasses both Card Not Present and Card Present transactions, as those terms are defined under the Reserve Bank of India (Authentication Mechanisms for Digital Payment Transactions) Directions, 2025.

Fraudulent Electronic Banking Transaction

Paragraph 4(14A) defines a Fraudulent Electronic Banking Transaction (Fraudulent EBT) as:

An EBT executed by a third party using credentials obtained from the customer through fraudulent means, or executed by the customer under coercion or duress exerted by a third party, and/or an Unauthorised EBT as defined at paragraph 4(25B).

Negligence by a Customer

Paragraph 4(19B) enumerates specific conduct that constitutes negligence by a customer, including:

  • Failing to exercise reasonable care over credentials such as PIN, password, or OTP — for instance, sharing these details with another individual or physically noting down a PIN alongside a debit/credit card
  • Delayed notification to the UCB after becoming aware of a fraudulent EBT or card loss
  • Disregarding specific, direct, and clear warnings issued by the UCB that a prospective transaction is likely fraudulent
  • Downloading malicious or harmful applications
  • Failure to update a registered mobile number or email address with the UCB following any change

Negligence by a UCB

Paragraph 4(19C) correspondingly defines negligence by a UCB to include:

  • Failure to implement mandated systems and procedures for ensuring the safety and security of EBTs
  • Non-dispatch of mandatory alerts for EBTs
  • Absence of round-the-clock channels for reporting fraudulent transactions or card loss/theft
  • Failure to act diligently upon customer notifications concerning unauthorised EBTs or card loss
  • System malfunctions, security breaches, or internal frauds resulting in unauthorised EBTs

Shadow Reversal

A newly introduced concept under paragraph 4(24A), Shadow Reversal refers to:

The temporary or provisional credit of the amount involved in fraudulent EBT(s), provided by a UCB to a customer upon receipt of the customer's notification, prior to the completion of the internal investigation, settlement of any insurance claim, or any other settlement with third parties.

Importantly, while the customer cannot utilise such provisionally credited funds, no additional interest or charges shall be levied on the customer in connection with the shadow reversal amount.

Third-Party Breach