Banks Cannot Enforce Credit Card Recovery on Disputed Transactions Without Proving Authorization: Delhi HC
- REEDLAW
- 4 hours ago
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REEDLAW Legal News Network reports: In a significant ruling impacting consumer rights in digital payments, the High Court held that financial institutions cannot effect recovery, levy charges, or initiate automated reminders for disputed electronic transactions until due authorisation is conclusively demonstrated. The Court emphasised that customers must not be burdened with any liability unless robust authentication parameters, traceable audit mechanisms, and transparent accountability structures are shown to have been duly complied with.
The Delhi High Court Single-Judge Bench of Justice Prathiba M. Singh evaluated whether a bank could impose financial consequences arising from disputed credit card transactions without establishing authorisation. The Bench noted that modern electronic platforms impose obligations on service providers to maintain auditable trails and verifiable consent mechanisms. It was observed that unilateral recovery measures, automated communications, and charge impositions, without foundational proof of customer-initiated authorisation, were arbitrary.
A petition had been filed challenging the debiting of a disputed transaction amount on a credit card which the Petitioner claimed was neither requested nor activated. The Petitioner had originally used one credit card, but a second card was issued without any specific request. Immediately after issuance, a transaction for ₹76,777 was executed through a digital payment platform as rent payment. According to the Petitioner, the card had never been activated, and no OTP or authentication was received. A complaint was initially raised with the Bank and also with the cyber cell. The Bank had provisionally reversed the disputed amount, but subsequently reinstated the liability and continued to levy interest and penalty charges. The Petitioner therefore approached the Ombudsman, and later the Court, seeking reversal of charges, restoration of credit score, and refund of penalty amounts.
Upon filing of the writ petition, the Court restrained coercive recovery measures. Despite such protection, a demand notice was issued, followed by repeated calls and reminders, resulting in the Petitioner initiating contempt proceedings. When the contempt petition was heard, it emerged that automated recovery communications were being issued and collection personnel had even approached the Petitioner’s residence. The Court directed senior officers of the Bank to remain present, and sought an affidavit identifying responsible personnel behind official communications, clarification on procedures for change of registered mobile number, and the accountability mechanism behind system-generated notices.
During the proceedings, the Bank stated that the transaction had been authenticated through IPIN/OTP credentials and contended that changes to credentials and the registered mobile number were made from the Petitioner’s end. The Petitioner denied any such authorisation and asserted that crucial verifications were bypassed, including the blocking of the first card and issuance of the second card. An unconditional apology was tendered by the Bank, and the disputed charges, including penalty and interest, were reversed. The contempt proceedings were thus discharged, subject to continued participation of senior officials in further hearings on the main petition.
The Court recorded concern over systemic issues affecting banking consumers, particularly relating to anonymous automated communications and a lack of direct accountability. Directions were issued requiring improved transparency, disclosure of responsible personnel, and an affidavit on verification procedures regarding the change of registered credentials, such as mobile numbers. Further hearing was directed on the principal dispute regarding liability for unauthorised electronic transactions and the obligations of banking institutions to protect consumers from financial fraud.
Mr. Sarwar Raza, Advocate, the Appellant, appeared in person
Mr. Ramesh Babu, along with Mr. Rohan Srivastava, Ms. Jagriti Bharti and Ms. Tanya Chowdhary, Advocates, represented the RBI.
Mr. Sanjeev Sindhwani, Sr. Advocate, with Ms. Suruchi Suri, Advocate, appeared for the Respondent No. 2.
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