Unified Payments Interface (UPI) is transforming how people in India transact money. With its user-friendly interface and robust security features, UPI has become the preferred mode of payment for millions of Indians, making it one of the fastest growing payment systems in the world.

In a recent development, India and Singapore linked their digital payments systems, UPI and PayNow, to enable instant and low-cost fund transfers in a significant push to disrupt the cross-border flow of money between the two nations that amounts to more than $1 billion each year. However, the emerging cases of bank account freezing of some Kerala merchants after receiving UPI payments signify a threat to the model’s existence.

Reportedly, there are at least seven cases of bank account freezing in Kerala. A leading Kerala media house reported the case of Ismail Ibrahim Kutty, who runs a restaurant business in Alappuzha. He received ₹300 from a person through UPI, post which his account got frozen. When enquired, he learned that there was a cyber-case involving the sender’s bank account in Gujarat. Due to this, Ibrahim Kutty cannot withdraw his life earnings from the bank account.

When a person ‘A’ indulges in cyber financial crime and transfers that money from his account to person ‘B’ and ‘C’, the cyber police direct banks to freeze the account of person ‘B’ and ‘C’ on the assumption that the person ‘A’ must have safely transferred that money to other accounts of his or to other partners in crime. However, it may be possible that ‘A’ used the funds to purchase goods and services from different merchants, such as ‘B’ or ‘C’, who are selling that by following the rule of the land, but unaware of the financial scam carried out by ‘A’.

What is the justification of freezing the bank accounts of such innocent merchants who are not even accused in the case, and without carrying out a proper investigation? It is also difficult for an ordinary man to get in touch with the legal department of a different State to get justice. In many cases, cyber police ask third parties (person B or C in this case) to return the money the complainant lost. This action is contrary to all canons of law.

In a similar incident last year, PhonePe Director’s personal bank account was debited to the extent of the amount lost by the complainant in an online scam. While hearing the plea submitted by PhonePe and its Director, the High Court of Karnataka stated that an intermediary could not be held responsible for the financial fraud committed by someone else under the Information Technology Act. It instructed the police to refund the money to the PhonePe Director and trace the alleged fraudster instead. The court had issued a directive to all the magisterial courts in the State to refrain from ordering the seizure of bank accounts of persons not identified as accused of cyber fraud and cybercrime.

The RBI must step in, not just to give justice to the affected bank account-holders but also to instill faith in the UPI system. Otherwise, the chances of merchants refraining from UPI transactions could rise in the future, dampening the digital payments push of the Government.

The writer is an Assistant Professor of Finance at IIM, Kozhikode

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