Legal Aspects of E Banking

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Legal Aspects of E Banking

E Banking regulatory structure

Legal aspects of Banker Customer relationship
Recognition of Electronic Documents
Recognition of Authentication Systems
Legal Aspects of Forgery
Legal aspects of Electronic payment
instructions
E Banking frauds
E Banking dispute resolution system
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Regulation of Banking in India

Banking Regulation Act and RBI Act

Indian Contract Act
NI Act
ITA2000/8
Payment and Settlement Act
PMLA 2002
IPC/IEA
SARFAESI Act (The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002)
Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (DRT Act). - See more at:
Sale of Goods Act, Transfer of Property Act etc

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E Banking regulatory structure

E Banking is not a separate business

Banking is regulated by RBI under RBI Act

It is Banking using E Channels.

Subject to licensing

Law regarding Electronic documents is

contained in Information Technology Act 2000

As amended by Information technology Act 2008

ITA 2000/8

E Banking is therefore under the dual regulation

of RBI and provisions of ITA 2000/8
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E Banking regulations

In 1997 when ICICI Bank started Internet

Banking, there was no ITA 2000

There was no recognition for electronic

documents
E Banking at that time was therefore not
supported by law

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E Banking regulations

After ITA 2000 notification on 17th October 2000

RBI constituted the S R Mittal Working group to

recommend on regulation for Internet Banking

Culminated in Internet Banking Guidelines 2001 through

an RBI circular dated June 14, 2001

In March 2003, Negotiable Instruments

Amendment Act 2002 was notified

First comprehensive regulatory guidelines on Internet

Banking

Introduced the concept of Truncated Cheques and

Cheques in E Form
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E Banking regulations

In December 2008, substantial amendments were passed to ITA 2000

Notified on 27th October 2009

Cyber Fraud guidelines are issued from time to time by RBI

In January 2011, G Gopalakrishna Working group (GGWG) on E
Banking Security released its report

Notified with some changes on April 29 2011

Additionally, Damodaran Committee (August 2011) on Customer

Services and Banking Ombudsman conference (September 2011)
have given further operational guidance for E Banking regulation

Constitutes the current regulatory guidelines as an extension of IBG 2001

These extend IBA guidelines on Customer service and RBIs Banking

Ombudsman scheme
Regulatory framework of E Banking is therefore derived from all the above
regulations

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Legal aspects of Banker

Customer relationship

Banker Customer relationship

Debtor and Creditor

With conditionality on how the debt will be liquidated

In a deposit account, Customer lends his money to the

Bank and is therefore a creditor of the bank
In a Loan account Customer is the debtor of the Bank
Debt on a deposit account is repaid on demand by
cheques in a SB/CA transaction
Until the demand is made the money remains that of
the Bank and is fungible with the other resources.
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Recognition of Electronic
Documents

Under Section 4 of ITA 2000

Where any law provides that information or any other

matter shall be in writing or in the typewritten or printed
form, then, notwithstanding anything contained in such law,
such requirement shall be deemed to have been satisfied if
such information or matter is
(a) rendered or made available in an electronic form;
and
(b)accessible so as to be usable for a subsequent
reference

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Excluded Documents

Schedule 1

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(a) A Negotiable Instrument (Other than a cheque) as

defined in Section 13 of the Negotiable Instruments
Act 1881 (26 of 1881)
(b) A Power of Attorney as defined in section 1A of
the Power of Attorney Act 1882 (7 of 1882)
(c) A trust as defined in section 3 of the Indian Trusts
Act, 1882 (2 of 1882)
(d) A will as defined in clause (h) of section 2 of the
Indian Succession Act, 1925 (39 of 1925) including
any testamentary deposition whatever name called
(e) Any contract for the sale or conveyance of
immovable property or any interest in such property
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Legal Aspects of Forgery

CanaraBank Vs Canara Sales Corporation

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HELD: 1. if the signature on the cheque is not

genuine there is no mandate on the bank to pay.
The bank when it makes payment on such a cheque,
cannot resist the claim of the customer with the
defence of negligence on his part such as leaving the
cheque book carelessly so that third parties would
easily get hold of it.
This is because a document in cheque form on which
the customer's name as drawer is forged is a mere
nullity. [1147B-D]
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What is Forgery in E Banking

Government of Tamil Nadu Vs Suhas Katti

Accused had entered the name of a different person at the end of a

message posted on Yahoo

Held as a forgery under IPC Sec 464

[A person is said to make a false document or false electronic

record

FirstWho dishonestly or fradulently

(a) makes, signs, seals or executes a document or part of a document;

(b) makes or transmits any electronic record or part of any electronic record;
(c) affixes any electronic signature on any electronic record;
(d) makes any mark denoting the execution of a document or the authenticity of
the electronic signature,

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with the intention of causing it to be believed that such document or part of

document, electronic record or electronic signature was made, signed, sealed,
executed, transmitted or affixed by or by the authority of a person by whom or by
whose authority he knows that it was not made, signed, sealed, executed or
affixed; or

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What is Forgery in E Banking

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SecondlyWho, without lawful authority, dishonestly or fraudulently, by cancellation or otherwise, alters a document or an
electronic record in any material part thereof, after it has been
made, executed or affixed with electronic signature either by
himself or by any other person, whether such person be living
or dead at the time of such alteration; or
ThirdlyWho dishonestly or fraudulently causes any person to
sign, seal, execute or alter a document or an electronic record
or to affix his electronic signature on any electronic record
knowing that such person by reason of unsoundness of mind or
intoxication cannot, or that by reason of deception practised
upon him, he does not know the contents of the document or
electronic record or the nature of the alteration.

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Legal aspects of Electronic

payment instructions

Electronic payment instructions are a

mandate by a customer to a Bank in their
capacity of the Banker customer relationship

E Cheque/Truncated Cheques are

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Are in the nature of cheques

Hence laws of forgery are applicable
Mirror images of actual cheques

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NIAA 2002
Substitution of new section for Section 6.

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For section 6 of the Negotiable Instruments Act, 1881

(26 of 1881) (hereinafter in this Chapter referred to as
the principal Act), the following section shall be
substituted, namely:"Cheque".
A "cheque" is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise
than on demand and it includes the electronic image
of a truncated cheque and a cheque in the electronic
form.
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NIAA 2002 Products

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Truncated Cheques
Cheques in Electronic form (E-Cheques)

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Truncated Cheques

Defined under the NIAA 2002

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"a truncated cheque" means a cheque which is

truncated during the course of a clearing cycle,
either by the clearing house or by the bank
whether paying or receiving payment,
immediately on generation of an electronic image
for transmission, substituting the further physical
movement of the cheque in writing

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E-Cheque

Defined under the NIAA 2002

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" a cheque in the electronic form" means a

cheque which contains the exact mirror image of
a paper cheque, and is generated, written and
signed in a secure system ensuring the minimum
safety standards with the use of digital signature
(with or without biometric signature) and
asymmetric cryptosystem.

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Responsibilities prescribed for bankers

Modified Sections 64, 81, 89 and 131 of NI

Act define certain duties and due diligence
factors necessary to be followed in handling
truncated cheques or E-cheques

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Sec 64 (Presentment)
Section 81 (Possession)
Section 89 (apparent tenor)
Section 131 (collecting bankers responsibility)
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Sec 131 modified

"Explanation II.-It shall be the duty of

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the banker who receives payment

based on an electronic image of a truncated cheque held
with him,
to verify the prima facie genuineness of the cheque to be
truncated and any fraud, forgery or tampering apparent on
the face of the instrument that can be verified with
due diligence and ordinary care.

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Sec 81 modified

Where the cheque is an electronic image of a

truncated cheque, even after the payment
the banker who received the payment shall
be entitled to retain the truncated cheque

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A certificate issued on the foot of the printout of

the electronic image of a truncated cheque by the
banker who paid the instrument, shall be prima
facie proof of such payment."

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Sec 64 modified

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"(2) Notwithstanding anything contained in section 6, where an

electronic image of a truncated cheque is presented for
payment,
the drawee bank is entitled to demand any further information
regarding the truncated cheque from the bank holding the
truncated cheque in case of any reasonable suspicion about
the genuineness of the apparent tenor of instrument, and if the
suspicion is that of any fraud, forgery, tampering or destruction
of the instrument,
it is entitled to further demand the presentment of the truncated
cheque itself for verification:
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Sec 89 modified

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Where the cheque is an electronic image of a truncated

cheque, any difference in apparent tenor of such electronic
image and the truncated cheque shall be a material alteration
and
it shall be the duty of the bank or the clearing house, as the
case may be, to ensure the exactness of the apparent tenor of
electronic image of the truncated cheque while truncating and
transmitting the image.
Any bank or a clearing house which receives a transmitted
electronic image of a truncated cheque, shall verify from the
party who transmitted the image to it, that the image so
transmitted to it and received by it, is exactly the same."
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Authentication

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Sec-5
Where any law provides that information or any other matter
shall be authenticated by affixing the signature or any
document should be signed or bear the signature of any
person then,
notwithstanding anything contained in such law,
such requirement shall be deemed to have been satisfied, if
such information or matter is authenticated by means of
digital signature affixed in such manner as may be
prescribed by the Central Government.

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Authentication..2

Sec- 3

Authentication of Electronic Records

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(1)Subject to the provisions of this section any

subscriber may authenticate an electronic record by
affixing his digital signature.
(2)The authentication of the electronic record shall be
effected by the use of asymmetric crypto system and
hash function which envelop and transform the initial
electronic record into another electronic record.

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Digital Signatures-What they are not

It is not a Scanned form of a Signature

It cannot be seen

It is a variable

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Only the digital certificate can be seen

It is document specific

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Digital Signature-What they are

It is a Device that enables us to fulfill the

requirements of a non repudiable
authentication mechanism in a Digital
Society.
Sub Functions

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Authentication
Data Integrity

Optional

Confidentiality
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Technology Behind Digital Signatures

Components of Digital Signature

Hash Algorithm

Encryption through Asymmetric Cryptography

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To Ensure Data Integrity

To Ensure identification of the signer

Together they give Non Repudiation

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Technology Behind Digital Signatures

Digital Signature System is built on the

foundation of two technologies, Hashing and
Asymmetric Crypto System
Digital Signature System

Hash

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Asymmetric
CryptoSystem

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Technology Behind Digital

Signatures3

Hashing Ensures Data Integrity

Document has not been changed since it has

been signed
Digital Signature System

Hash

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Asymmetric
CryptoSystem

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Technology Behind Digital

Signatures4

Asymmetric Crypto System

Provides a means for identifying who has signed

Digital Signature System

Hash

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Asymmetric
CryptoSystem

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Digital Signature Definition

Digital Signature

Of a document of a person
Is
The hash value of the document encrypted with the
private key of the person

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Hash+Asymmetric Cryptosystem

When We Calculate the Hash value of an electronic

document

It becomes the fingerprint of the document

When the hash value is encrypted with the private

key of a person,

The encrypted hash value of a document becomes a finger

print of a document which can also be identified with the
person who has encrypted the hashcode

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..This is the Digital Signature of the document of a person

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How does a Digital Signature look like?

ece376f327f3128a4aca3e823a5ab334
What does an encryption of this look like?

This is how the digital signature looks like

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JZBENXupUuV88lt2MlvSUEdLJKarJ+8PhLcsHd
CzVpGkoT290X/PK49scyuRNydTnwgWcjI/D/i9v
OcElmtC3D/7R1Ip2Z7DJ+Z5Yhkqv+fhXmARxj+x
wYEP1MfGxMv7HVHJzRdZAuTRqdXMuDbfgTW
np18QX1Up5KUXfYgi1kQ=
(hexa decimal representation)
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How does a Digital Signature look like?

01001010 01011010 01000010 01000101 01001110 01011000 01110101 01110000 01010101 01110101
01010110 00111000 00111000 01101100 01110100 00110010 01001101 01101100 01110110 01010011
01010101 01000101 01100100 01001100 01001010 01001011 01100001 01110010 01001010 00101011
00111000 01010000 01101000 01001100 01100011 01110011 01001000 01100100 01000011 01111010
01010110 01110000 01000111 01101011 01101111 01010100 00110010 00111001 00110000 01011000
00101111 01010000 01001011 00110100 00111001 01110011 01100011 01111001 01110101 01010010
01001110 01111001 01100100 01010100 00001101 00001010 01101110 01110111 01100111 01010111
01100011 01101010 01001001 00101111 01000100 00101111 01101001 00111001 01110110 01001111
01100011 01000101 01101100 01101101 01110100 01000011 00110011 01000100 00101111 00110111
01010010 00110001 01001001 01110000 00110010 01011010 00110111 01000100 01001010 00101011
01011010 00110101 01011001 01101000 01101011 01110001 01110110 00101011 01100110 01101000
01011000 01101101 01000001 01010010 01111000 01101010 00101011 01111000 01110111 01011001
01000101 01010000 00110001 01001101 01100110 01000111 01111000 01001101 01110110 00110111
00001101 00001010 01001000 01010110 01001000 01001010 01111010 01010010 01100100 01011010
01000001 01110101 01010100 01010010 01110001 01100100 01011000 01001101 01110101 01000100
01100010 01100110 01100111 01010100 01010111 01101110 01110000 00110001 00111000 01010001
01011000 00110001 01010101 01110000 00110101 01001011 01010101 01011000 01100110 01011001
01100111 01101001 00110001 01101011 01010001 00111101

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A binary representation

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Prerequisites

Digital Certificate issued by a licensed Certifying

authority

Appropriate Application to use the Digital Signature

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Provides Encryption Key pair through a software

Provides Mapping of Digital Identity to Physical Identity
Enables Distribution of Public key of the signer
Outlook Express
Internet Explorer
Office XP

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SARFAEISI ACT

The Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act,
2002 (SARFAESI)

empowers Banks / Financial Institutions to recover

their non-performing assets without the intervention of
the Court.
The Act provides three alternative methods for
recovery of non-performing assets, namely:

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Securitisation
Asset Reconstruction
Enforcement of Security without the intervention of the
Court
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SARFAESI ACT..2

The Act empowers the Bank:

To issue demand notice to the defaulting borrower and

guarantor, calling upon them to discharge their dues in
full within 60 days from the date of the notice.

To give notice to any person who has acquired

any of the secured assets from the borrower to
surrender the same to the Bank.
To ask any debtor of the borrower to pay any
sum due or becoming due to the borrower.
Any Security Interest created over
Agricultural Land cannot be proceeded with.

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SARFAESI ACT..3

If on receipt of demand notice, the borrower makes any representation

or raises any objection,

A borrower / guarantor aggrieved by the action of the Bank can file an

appeal with DRT and then with DRAT, but not with any civil court.

The borrower / guarantor has to deposit 50% of the dues before an appeal with
DRAT.

If the borrower fails to comply with the notice, the Bank may take
recourse to one or more of the following measures:

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Authorised Officer shall consider such representation or objection carefully and

if he comes to the conclusion that such representation or objection is not
acceptable or tenable, he shall communicate the reasons for non acceptance
WITHIN ONE WEEK of receipt of such representation or objection.

Take possession of the security

Sale or lease or assign the right over the security
Manage the same or appoint any person to manage the same

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Payment and Settlement Act-2007

The PSS Act, 2007 received the assent of the President on 20th December 2007
and it came into force with effect from 12th August 2008.

provides for the regulation and supervision of payment systems in India

designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and
all related matters.

The Act also provides the legal basis for netting and settlement finality.
Under the PSS Act, 2007,

operating a payment system without authorization,

failure to comply with the terms of authorization,
failure to produce statements, returns information or documents or
providing false statement or information,
disclosing prohibited information,
non-compliance of directions of Reserve Bank violations of any of the provisions of the Act ,
Regulations, order, directions etc.,

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are offences punishable for which Reserve Bank can initiate criminal prosecution. R
eserve Bank is also empowered to impose fine for certain contraventions under the Act. (Sections 26
and 30 of the PSS Act, 2007).

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NEFT

System of transfer of funds between banks

where the settlement is on Net basis at
periodical intervals

hourly batches

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twelve settlements from 8 am to 7 pm on week days and

six settlements from 8 am to 1 pm on Saturdays
Settlement on the same day or the next day depending on
the time of transaction

Maximum per transaction 50000/- no other

maximum or minimum criteria
Available in around 80000 branches
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RTGS

System where settlement happens instantly between

Banks unlike NEFT where the settlement is on Net
basis at periodical intervals.

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The beneficiary bank has to credit the beneficiary's account

within two hours of receiving the funds transfer message.
Available between 9.00 hours to 16.30 hours on week days and
from 9.00 hours to 13.30 hours on Saturdays

Introduced in 2004
Available in 78,000 branches
RTGS available only for Rs 2 lakh and above
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IMPS (Immediate Payment System/Inter Bank

Mobile Payment System)

Launched in 2010 by a handful of Banks

24X7 interbank electronic fund transfer service

through mobile phones
Provide by National Payment Corporation of India
through NFS switch

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NFS (National Financial Switch is the network shared by

ATMs, developed and deployed by IDRBT
Maximum Rs 5 lakhs
can carry out Person to Person(P2P), Person to
Account(P2A) and Person to Merchant(P2M) transactions
from their mobile, Internet or ATM
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ECS

4
4

Electronic Clearing Service (ECS) is a retail payment system that can be

used to make bulk payments / receipts of a similar nature especially where
each individual payment is of a repetitive nature and of relatively smaller
amount. T
his facility is meant for companies and government departments to
make/receive large volumes of payments rather than for funds transfers by
individuals.
The ECS facility is available in 64 centers across India operated by RBI at
places where it manages the clearing houses and by SBI and other public
sector banks in other centres.
The ECS is further divided into two types ECS (Credit) to make bulk
payments to individuals/vendors and ECS (Debit) to receive bulk utility
payments from individuals.
Electronic Clearing Scheme (ECS) operated by the RBI since 1996-97
Utilizes BANKNET and INFINET

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SWIFT www.swift.com

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Society for Worldwide Inter-bank Financial Telecommunication,

HQ La Hulpe, Brussels, Belgium
Provides reliable, fast tele-communication facilities for exchange
of financial messages all over the world between Banks and FIs
As non-profit making co-operative society in 1973 by 239 banks in
15 countries
Hubs in Brussels, New York and Netherlands
Rules in 1975; first message in 1977
>7,000 members in 200 countries now
Handles over 7 million messages every day
India a member since 1991
88 Indian banks are members as on date
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SWIFT contd...

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Any Bank / FI can become a member

Allots an address called Bank Identi-fication Code
(BIC) of 8 characters
Enables members to send secure and reliable
messages authenticated...
Correspondent bank arrangements...
Advantages: 24 hours service, system based fraudfree faster accurate confidential
funds/LCs/Guarantees
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Eft Cheques of ICICI

ICICI Bank eftCheques app

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To enable quick, convenient and secure transfer

of funds to a beneficiary, while maintaining the
cheque writing experience.
Customer can deposit a cheque, check the status
of physical cheques etc

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Eft Cheque-features

Write eftCheque

Deposit Cheque

Check the status of physical cheques issued to / from your

account

eftCheque History

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Deposit scanned image of physical cheque issued to you

Cheque Query

Issue an eftCheque to a mobile number of your choice

Check past debit transactions done through eftCheques

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Issuing an eft Cheque

Prerequisite

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Download App, Register

Open Write Cheque page..enter name,

account number and balance, beneficiary
mobile number, Name, amount, IFSC Code
(for non icici beneficiary),..and submit
Enter OTP
Max: Rs 1 lakh per day
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Deposit of cheque electronically

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Open the eftChequeApp (to be registered)

Select account, read MICR band with MICR
reader
Scan front and back, verify details, submit
Deposit the physical cheque at the nearest
bank branch within specified time limit

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Encashing an eft cheque

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On successful issuance, issuer will receive

an eft Cheque code and pass digit code. The
pass cod should be shared with the
beneficiary.
Beneficiary gets an SMS with a link to ICICI
Bank website..should click to deposit the
funds providing his bank details and IFSC
code
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Encashment of eft Cheque

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1. Cheque Code
2. Pass code sent to issuer of the Cheque
3. If it is a Non-ICICI Bank Account, will
need the IFS code that is available in the
cheque book
4. Account Number

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Summary

New InstrumentsNew way of doing

Banking business

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Law is trying to cope with the changes

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Thank You..Questions?

Contact

www.naavi.org
www.cyberlawcollege.com
www.ceac.in

E-Mail: naavi@vsnl.com

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