Kerala High Court: Banks Can Impose Immediate Debit Freeze on Suspicious Accounts; RBI Asked to Frame SOP
The Kerala High Court has issued guidelines allowing banks to temporarily freeze (“debit-freeze”) customer accounts without prior notice if there is a reasonable suspicion of fraudulent or unusual activity. At the same time, the Court directed the Reserve Bank of India (RBI) to urgently draft a Standard Operating Procedure (SOP) to govern such freezes.
Key Directions from the Court
- Circumstances Warranting Freeze
Banks may impose an immediate freeze on debits when transactions strongly deviate from the account holder’s declared income or usual profile.
This applies even in the absence of a requisition from law-enforcement agencies, if the bank reasonably suspects misuse or cyber-financial crime.
- Communication with the Account Holder
On the same day as the freeze, the bank must notify the account holder via SMS and registered post.
The account holder should be informed of the suspicion and given an opportunity to explain.
- Reporting to Authorities
Banks must report the freeze to the jurisdictional cyber-crime police authority, consistent with existing RBI guidelines.
If the account holder provides an explanation, the bank must consider it and decide within one week.
- Duration of Freeze
If the explanation is not provided or is unsatisfactory, the freeze may continue for up to three months after notifying relevant authorities.
If no law-enforcement agency acts within that period, the bank must lift the freeze, allowing the account holder to access existing credit.
After lifting the freeze, the bank may either allow full operations or ask the account holder to close the account, depending on its continued concerns.
- Right to Challenge
If the bank rejects the account holder’s explanation, the holder has the right to challenge that decision through legal means.
- If Law-Enforcement Steps In
If a law-enforcement agency issues instructions during the freeze, the bank is obligated to comply without delay.
- Subsequent Freezes
Even after unfreezing, the bank can impose a fresh freeze if it again reasonably suspects future suspicious transactions, subject to its SOP (once framed).
Role of RBI
The Court emphasized that the RBI has a statutory duty (under Section 35A of the Banking Regulation Act) to safeguard the banking system, particularly against cyber-financial crime.
It directed the RBI to formulate a clear SOP that defines when and how banks can freeze accounts, striking a balance between preventing misuse and protecting account-holder rights.
Immediate Impact
These guidelines are interim and will apply until RBI issues its formal SOP.
The court also ordered South Indian Bank (in the case before it) to immediately follow these procedures and inform relevant authorities of its account freezes.
Significance
This ruling empowers banks to act swiftly against suspected cyber-fraud, while also ensuring procedural safeguards so that innocent account holders are not unfairly penalised.
By pressing the RBI to set standard rules, the court aims to create uniformity and accountability in how banks handle suspicious-account freezes across India.
