Banks seek RBI nod for getting authority to freeze accounts making illegal transactions. Here’s why

Slogan: “Secure Banking, Safer India: Freeze the Fraud Before It Spreads.”

Introduction: A Critical Step Toward Curbing Financial Crime

In a rapidly digitizing economy like India’s, the convenience of online banking and mobile money transfer systems has led to an exponential increase in financial transactions. However, with this growth has also come an alarming rise in digital fraud, illegal money transfers, phishing scams, and unauthorized account access. In response to this mounting concern, Indian banks have now formally approached the Reserve Bank of India (RBI), seeking regulatory permission to freeze customer accounts found involved in illegal or suspicious transactions. This development signifies a proactive move by the banking sector to enhance fraud prevention capabilities while aligning with global best practices. The proposed authority, if granted, will empower banks to swiftly block accounts suspected of money laundering, cybercrime proceeds, or fraudulent disbursements—thereby preventing the further spread of illicit funds across the financial system. In this blog, we will explore why banks are seeking such powers, how it affects account holders, the legal and ethical implications, and what safeguards must accompany such authority to balance security and individual rights.

What Banks Want from the RBI: A Closer Look at the Proposal

Banks in India, through various industry associations such as the Indian Banks’ Association (IBA), are urging the RBI to grant them real-time authority to temporarily freeze or put a hold on accounts engaged in illegal activity without waiting for prolonged investigative approvals. Currently, only law enforcement agencies and judicial courts have the mandate to freeze bank accounts under various legal provisions like the Prevention of Money Laundering Act (PMLA) or Section 91 of the CrPC. While banks can report and flag suspicious activities under anti-money laundering (AML) guidelines, they often lack immediate legal recourse to restrict ongoing fraud. The banks argue that by the time police or cybercrime units respond, illicit funds are often siphoned off to mule accounts or foreign destinations, making recovery nearly impossible. Hence, the industry is pushing for a compliance framework that empowers them to act instantly—possibly freezing such accounts for 24 to 72 hours under internal review until further regulatory or legal instruction is received. This move, banks say, will deter scammers and boost consumer trust in digital banking platforms.

Quote:

“Delay in freezing fraudulent accounts allows scammers to vanish without a trace. Giving banks the authority to act is crucial.” — Sunil Mehta, CEO, Indian Banks’ Association

The Surge in Financial Fraud: Why Now?

India’s digital transaction landscape has witnessed a meteoric rise in recent years. According to the National Payments Corporation of India (NPCI), the number of UPI transactions crossed 11 billion in March 2024 alone, indicating widespread adoption. However, cybercriminals have simultaneously adapted and evolved. In 2023, the Reserve Bank of India reported a 45% rise in digital fraud cases compared to the previous year, with estimated losses exceeding ₹1,400 crore. Fraudulent schemes range from phishing and remote access scams to synthetic identity fraud and mule accounts used for money laundering. With fraud becoming increasingly sophisticated, banks find themselves battling a race against time. The current procedure for seeking law enforcement intervention is cumbersome, especially in urgent fraud cases. Empowering banks with temporary account-freezing authority could help stop illicit funds before they are laundered or moved offshore. This authority would serve as a deterrent, helping India meet its FATF (Financial Action Task Force) obligations while enhancing financial stability in the long term.

Table: Growth of Digital Fraud Cases in India (2020–2024)

How Freezing Authority Works in Other Countries

Globally, several countries have already empowered financial institutions with conditional rights to freeze suspicious accounts temporarily. For example, in the United Kingdom, the National Crime Agency allows banks to freeze accounts for up to seven days under Suspicious Activity Reports (SARs) pending investigation. Similarly, the Financial Crimes Enforcement Network (FinCEN) in the United States provides banks the ability to place a temporary hold based on red flags from AML systems. These systems operate under clearly defined conditions to prevent misuse and protect customers’ rights. Indian banks are proposing a similar model—limited, reviewable authority with strong internal checks, audit trails, and a provision for notifying customers and the RBI. The goal is not to penalize innocent account holders, but to stop criminal networks from using the formal banking channel as a pipeline for illegitimate funds. Adopting a global-standard response mechanism will also enhance India’s standing in the global financial community.

Risks and Concerns: Balancing Security with Privacy

While the intent to curb fraud is commendable, this proposal raises critical legal and ethical questions. What if a bank mistakenly freezes a legitimate account based on flawed red flags? What recourse does the customer have? Consumer protection groups have raised alarms over the potential misuse of this authority, especially in cases of transaction errors, misidentification, or harassment. There must be strict rules, defined audit processes, and transparency in how such authority is implemented. Banks should be obligated to notify account holders, explain the rationale for freezing, and provide a grievance redressal mechanism. The RBI, if it grants approval, must clearly outline the conditions under which account freezing can take place. A centralized record of freeze actions should be maintained, subject to RBI audit. Ultimately, the key to success will lie in striking a careful balance between fraud prevention and individual financial rights.

Chart: Public Sentiment on Bank Account Freezing (Survey of 5000 respondents)