RBI’s Proposed New Rules: Banks May Freeze Only the Disputed Amount, Not the Entire Account

The Reserve Bank of India (RBI) has proposed a significant change in the way banks deal with accounts suspected of being linked to money-mule activity and cyber framework

Under the proposed framework, banks would be required to adopt a more targeted approach instead of freezing an entire bank account merely because a particular transaction has been flagged as suspicious.

Only the Disputed Amount to Be Frozen

The proposed framework focuses on temporarily holding the disputed transaction amount rather than freezing the customer’s entire account.

This is an important development from a customer-rights perspective because a complete account freeze can severely affect an individual’s ability to access legitimate funds, pay bills, receive salary or conduct ordinary financial transactions.

The proposed approach attempts to balance two competing concerns:

  • Preventing suspected cyber-fraud proceeds from being withdrawn or transferred;
  • Protecting legitimate customers from an indefinite or unnecessarily broad account freeze.

AI-Based Transaction Monitoring

Under the proposed framework, banks would be required to use AI-based transaction monitoring systems to identify unusual transfers.

The systems would look for transactions that are sudden, disproportionate to the customer’s declared profile or potentially connected with known cyber-fraud networks.

Transactions of ₹1,000 or more flagged as potentially linked to mule-account activity could come within the framework.

What Is a Money-Mule Account?

A money-mule account is generally an account used to receive, transfer or move funds obtained through fraudulent or illegal activities.

Such accounts can be used by cybercriminals to move money through multiple layers of bank accounts, making it difficult for investigators to trace the ultimate beneficiary.

However, a genuine account holder can sometimes become involved in a suspicious transaction without being the actual perpetrator of fraud.

This is where safeguards for legitimate customers become important.

Customer Gets an Opportunity to Explain

The proposed procedure would provide the account holder with 20 calendar days to establish the legitimacy of the disputed transaction.

The customer may provide:

  • Proof of identity;
  • The context of the transaction;
  • Relevant documents;
  • Evidence showing the source of the funds;
  • Other material explaining why the transaction is genuine.

The bank would then have 10 calendar days to examine the explanation and supporting evidence.

If the explanation is satisfactory, the temporary hold would have to be lifted immediately.

What Happens If the Suspicion Remains?

If the customer fails to respond within the prescribed 20-day period, or if the explanation does not satisfactorily dispel the suspicion of cyber fraud, the matter would move to the law-enforcement mechanism.

The bank would be required to refer the matter to the jurisdictional police through the prescribed NCRP/CFCRMS portal.

Importantly, the bank would not be permitted to simply keep the customer’s funds frozen indefinitely.

The law-enforcement authorities would then have 30 days from the referral to obtain a formal statutory restraint order.

A Significant Shift in Approach

The proposed framework represents a move away from the broad practice of freezing an entire account and towards a transaction-specific approach.

This can be particularly important in cyber-fraud cases where a small disputed amount may trigger restrictions on a bank account containing substantially larger amounts of legitimate funds.

The proposed mechanism attempts to ensure that the disputed amount remains protected while the customer continues to have access to undisputed funds, subject to the applicable procedure.

Effective Date

According to the report, the draft directions are proposed to take effect from April 1, 2027, although banks may adopt them earlier.

The framework is stated to follow the Supreme Court’s August 4, 2026 order concerning temporary debit holds and suspected money-mule accounts.

What Should Bank Customers Do If Their Account Is Frozen?

If a bank places a hold on an account or transaction, the customer should promptly seek written information regarding:

  1. The disputed transaction;
  2. The amount placed on hold;
  3. The reason for the restriction;
  4. The documents required by the bank;
  5. The procedure and timeline for submitting an explanation.

The customer should preserve transaction records, bank statements, invoices, agreements, identity documents and other evidence establishing the legitimate source and purpose of the transaction.

Conclusion

The RBI’s proposed framework could significantly strengthen the balance between cyber-fraud prevention and protection of legitimate bank customers.

Instead of allowing an entire account to remain frozen indefinitely, the proposed system would focus on the disputed amount, provide the customer an opportunity to explain the transaction and require law-enforcement authorities to take further action within a defined framework.

For ordinary bank customers, this could mean an important shift from blanket account freezing to targeted financial restrictions based on the disputed transaction.

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