Electronic Funding in India: The Legal Framework

Information and Technology has revolutionised the entire world. It has not left any stone unturned in computerising almost every system in the world. And it™s obvious that is has led to the revolution of the Banking system. Gone are the days when payment and fund transfer sources were limited to physical methods such as direct currency exchange or a written cheque method. With the emergence of internet and mobile banking system has marched ahead with introducing the concept of electronic transfer of funds.

Payment by physical delivery of money from payer to payee can be both risky and expensive. When the sender and receiver of money are located t different places and have their accounts in different banks, it is the electronic fund transfer which comes to the rescue. Electronic transfer of funds allows customers to make money transfers at the comfort of their home. Besides these there are several other advantages of electronic transfer of funds like we can get account information at our terminal. Information like current balance in our account, day’s transaction in the account and details of cash credit limit, drawing power, amount utilised etc.[1]

With the development of internet and subsequent introduction of e-commerce, m-commerce and Automated Teller Machines (ATMs), the industry has witnessed structural and functional changes. In addition to scaling borders, technology has enabled the banks to change strategic behaviour, improve their efficiency and cut down on transaction costs. Beginning its journey in Indian banking as an enabler, technology over a period of time has transformed into a business driver, and is fast becoming an inseparable part of banking process. [2]

Chapter 1: Definition

Electronic Transfer of Funds can be defined as any transfer of funds other than a transaction organised by cheque, draft or similar paper instrument, which is initiated through an electric terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct or authorise a financial institution to debit or credit an account.[3] We can say that it is a transaction which takes place over a computerised network, either among accounts at the same bank or to different accounts at separate financial institution. It is a branch of electronic commerce or e-commerce.

Electronic banking, also known as electronic fund transfer (EFT), uses computer and electronic technology in place of checks and other paper transactions. EFT™s are initiated through devices like cards or codes that let you, or those you authorize, access your account.

Such kind of transfer is done without direct physical intervention. It can also be called as ˜virtual banking™. It denotes the provision of banking and related services through extensive use of information and technology without direct recourse to the bank by the customer.[4]

The increased use of EFTs for online bill payments, purchases and pay processes is leading to a paper-free banking system, where a large number of invoices and payments take place over digital networks. EFT systems play a large role in this future, with fast, secure transactions guaranteeing a seamless transfer of funds within institutions or across banking networks.

EFT was launched by the Reserve Bank in 1995 with a view to modernizing funds transfer in the country and speed up the transfer of funds between and among the banks.

The following three kinds of transaction can be performed by electronic means:

• Debiting or crediting one™s own account.
• Transferring funds between two accounts by issuing a credit instruction to one™s own institutions.
• Transferring funds between two accounts by authorizing a debit authorization to another party.

Chapter 2: Services provided by EFTs

TYPES of electronic fund transfer system available to bank customers who want to push remittance to others bank accounts anywhere in India ­ the National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS).

• Real Time Gross Settlement: RTGS is a funds transfer system where transfer of money takes place from one bank to another on a real time basis. This is the fastest mode of funds transfer available in India through banking channel. The transaction isn™t put on a waiting list and cleared out instantly. RTGS payment gateway, maintained by the Reserve Bank of India makes transactions between banks electronically. The transferred amount is instantly deducted from the account of one banks and credited to the other bank™s account.

Users such as individuals, companies or firms can transfer large sums using the RTGS system. The minimum value that can be transferred using RTGS is Rs. 2 Lakhs and above. However there is no upper cap on the amount that can be transacted.

The remitting customer needs to add the beneficiary and his bank account details prior to transacting funds via RTGS. A beneficiary can be registered through your internet banking portal. The details required while transferring funds would be the beneficiary™s name; his/her account number, receiver™s bank address and the IFSC code of the respective bank.[5]

The main features of RTGS are:

a) Debit Push Transactions

b) Can be inter-bank or customer

c) Individual queue based model

d) Routed through RBI

e) Each bank can view its payments and receipts.

The membership type of each RTGS member determines the transaction types for which the RTGS member will be eligible under the RTGS System. The membership type will be assigned at the discretion of the RBI.[6]

• NEFT: The National Electronic Funds Transfer is a nation-wide money transfer system which allows customers with the facility to electronically transfer funds from their respective bank accounts to any other account of the same bank or of any other bank network. Not just individuals but also firms and corporate organizations may use the NEFT system to transfer funds to and fro.

Funds transfer through NEFT requires a transferring bank and a destination bank. With the RBI organizing the records of all the bank branches at a centralized database, almost all the banks are enabled to carry out an NEFT transaction. Before transferring funds via NEFT you register the beneficiary, receiving funds. For this you must possess information such as name of the recipient, recipient™s bank name, a valid account number belonging to the recipient and his respective bank™s IFSC code. These fields are mandatory for a funds transfer to be authorized and processed.

Any sum of money can be transferred using the NEFT system with a maximum cap of Rs. 10, 00, 000. NEFT transactions can be ordered anytime you want, even on holidays except for Sundays which are designated bank holidays. However, the transactions are settled in batches defined by the Reserve Bank of India depending upon specific time slots. There are 12 settlement batches operating at present between the time slot of 8am to 7 pm on weekdays and from 8 am to 1pm on Saturdays with 6 settlement batches.

The structure of charges that can be levied on the customer for NEFT is given below (as per RBI guidelines):

a) Inward transactions at destination bank branches (for credit to beneficiary accounts) Free, no charges to be levied from beneficiaries

b) Outward transactions at originating bank branches charges applicable for the remitter

– For transactions up to Rs 10,000: not exceeding Rs 2.50 (+ Service Tax)

– For transactions above Rs 10,000 up to Rs 1 lac: not exceeding Rs 5 (+ Service Tax)

– For transactions above Rs 1 lac and up to Rs 2 lacs: not exceeding Rs 15 (+ Service Tax)

– For transactions above Rs 2 lac: not exceeding Rs 25 (+ Service Tax)

NEFT transaction timings for Monday Friday is 8 A.M to 6.30 P.M and for Saturday it is 8 A.M to 12 P.M. There is no minimum and maximum limit for transfer.[7]

Customers can remit any amount using NEFT Customer intending to remit money through NEFT has to furnish the following particulars:

• IFSC (Indian Financial System Code) of the beneficiary Bank/Branch
• Full account number of the beneficiary
• Name of the beneficiary.

The facility is also available through online mode for all internet banking and mobile banking customers. For corporate customers, bulk upload facility is also available at branches.[8]

• Direct Deposits: Electronic funds that are deposited directly into your bank account rather than through a paper check. Common uses of a direct deposit include income tax refunds and pay checks.[9] For e.g. Direct Deposits can be used to deposit funds into a checking, savings or other types of accounts on prior arrangement with the employer and employee™s bank. Once arrangements have been made, the employer automatically transfers employee™s wages directly into their bank accounts without any physical money or cheques.

How to set up Direct Deposit?

Download the Direct Deposit Information Form and follow the three easy steps below to set up Direct Deposit.

Step1. Gather account information. You will need to provide the type of account (checking/prepaid, or savings) and your account number and routing number (RTN). The diagram on the Direct Deposit Information Form shows where to find this information.

Step2. Contact your employer or payer before setting up Direct Deposit. Ask if your employer or payer (the company or agency who pays you) offers Direct Deposit services. If so, your payer may need you to complete a form or provide a voided check to process your request for Direct Deposit.

Step3. Monitor your account. It may be one or two months before Direct Deposits go into effect ” look for your first Direct Deposit about four weeks after your request.[10]

• Pay-by-Phone Systems: let you call your financial institution with instructions to pay certain bills or to transfer funds between accounts. You must have an agreement with your institution to make these transfers. Mobile banking addresses this fundamental limitation of internet banking by reducing the customer requirement to just a mobile phone. The kind of banking and financial service that gives a real-time mobile access to customers on the move is called ˜mobile banking™.
• Ø To register and use mobile
• banking services, following essential requirements have to be met:
• a) Service is available only to existing customer of the branch
• b) Registration for internet and mobile banking services
• c) Available for individual customer
• d) Need for owning a mobile phone

• Cheque Truncation: is a process in which the image or relevant date of a cheque is electronically captured and transmitted to enable payment of that Cheque to the payee™s account and simultaneously debiting the account of the drawer without physical movement of cheques itself. [11] In India, the RBI has made available inter-bank and customer payments online in near-real time in the form of RTGS and NEFT. However, cheques still remain a prominent mode of payment in the country. Physical cheques still account for 75% to 80% of all transactions. So, the RBI has decided to focus on improving efficiency of the cheque clearing cycle. Thus, offering CTS is an alternative. CTS also reduce operational risk in banking operations as clearing is a highly fraud-prone operation.

Chapter 3: Electronic Fund Transfer At Point Of Sale

The parties involved here are an issuer (a person who in the course of his business makes available to the member of the public a payment device pursuant to a contract concluded with him), a system provider ( a person who makes available a financial product under a specified trade name and usually with a network and thereby enabling payment devices to be used for the operations) and contracting holder (a person who pursuant to a contract concluded between him and issuer holds a payment device ) of the retailer and the banker.

Debit Card Purchase or Payment Transactions: It lets you make purchases or payments with a debit card, which also may be your ATM card. Transactions can take place in-person, online, or by phone. The process is similar to using a credit card, with some important exceptions: a debit card purchase or payment transfers money quickly from your bank account to the company’s account, so you have to have sufficient funds in your account to cover your purchase. Debit cards eliminate the need to carry cash or physical checks to make purchases. In addition, debit cards, also called check cards, offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard. Unlike credit cards, they do not allow the user to go into debt, except perhaps for small negative balances that might be incurred if the account holder has signed up for overdraft coverage.[12]

Credit Cards: A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual’s credit rating.[13]

Automatic Teller Machine: These are electronic terminals that let you bank almost virtually any time. To withdraw cash, make deposits, or transfer funds between accounts, you generally insert an ATM card and enter your PIN. It is an electronic computerized telecommunications device that allows a financial institution’s customers to directly use a secure method of communication to access their bank accounts, order or make cash withdrawals (or cash advances using a credit card) and check their account balances. Some financial institutions and ATM owners charge a fee, particularly if you don’t have accounts with them or if your transactions take place at remote locations. In case of ATM cards, a person other than the card holder will not be able to use it for cash withdrawals because of the secrecy surrounding the card holder™s Personal Identification Number. Also most banks limit the amount of cash that can be withdrawn on any single day.

The following functions are performed on ATM:

a) Cash withdrawal

b) Deposit of cash, cheques or drafts

c) Balance enquiry and statement ordering facility

d) Cheque book request facility

e) Fund transfer facility

f) Mini-statement facility

g) Pin change facility

h) Passbook update facility

i) Dispensing traveller™s cheque (available at international airports)

Smart Card: Smart cards are credit card sized plastic containing large amount of information in an embedded micro-chip. The credit amount of the customer account is written on the card with magnetic methods. The computer can read these magnetic spots. When the customer uses this card, the credit amount on the card starts decreasing. After being used a number of times there comes a stage when the balance becomes nil on the card. At this juncture, the card is of no use. The customer has to deposit cash in his account to re-use the card.[14]

Chapter 4: Legal Framework

1. The Indian Parliament enacted the Information and Technology Act, 2000 which provides legal recognition for transactions carried out by means of electronic communication. Consequent upon legal recognition given to electronic records, electronic documents and electronic signature incidental amendments have also been made in the following Acts :-

• IPC
• Indian Evidence Act 1872
• The Bankers™ Evidence Act , 1891
• The Reserve Bank of India Act, 1934

1. One can file an application before the Adjudicating Officer appointed under Section 46 of Information Technology Act, 2000 claiming breach of reasonable security procedures by the bank. As per Section 43A of Information Technology Act, 2000 the banks and other intermediaries who have failed to maintain reasonable security procedure must pay adequate damages as compensation to such person to cover the loss. The Adjudicating Officer has the power to adjudicate in the matters where the claim does not exceed Rs 5 crores. The bank must prove that they have maintained reasonable security procedures to prevent such fraudulent acts. In case the bank fails to prove that they have maintained reasonable security procedure, the Adjudicating Officer who has the powers of a Civil Court, may order the bank to pay damages as compensation to the victim.[15]
2. Reserve Bank of India shall introduce a system called “The Reserve Bank of India Electronic Funds Transfer System – 1997” which may be referred to as “RBI EFT System. It has provided the rights and obligations of participating banks and institution under Section 8.The RBI Act has been amended by the IT Act 2000(21 of 2000) empowering the Central Board to make regulations for fund transfer through electronic means between the banks or between the banks and other financial institutions.[16]
3. Digital Signature Certificates (DSCs) and e-filing of e-forms with Digital Signatures have been made mandatory under the Companies Act.
4. In India, prior to 2007, there was no enactment which expressly dealt with the issue of EFT. To address this lack of legislation pertaining to EFT, Payment and Settlement Systems Act was enacted in 2007 (PSS Act). The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank as the authority for that purpose and all related matters. —The sub-section (5) of the section 25 of the Payment and Settlement Systems Act, 2007 provides for punishment of two years and twice the amount of electronic funds transfer instruction, or both for dishonour of such electronic funds transfer on par with the penalties stipulated for dishonour of cheques under the Negotiable Instruments Act,1881.
5. Under Negotiable Instruments Act, cheque includes electronic image of a truncated cheque and a cheque in electronic form. The truncation of cheques in clearing has been given effect to and appropriate safeguards have been made in this regard by the RBI from time to time. Under the Act, cheques would have to be presented for payment to drawee or drawer bank. Without such presentment, no cause of action arises against the drawer.
6. As regards various aspects of customer service, the Reserve Bank has been issuing directions or guidelines from time to time to deal with certain aspects like reconciliation of transactions at ATMs failure, enhance security measures for online card transactions, etc. In addition to these measures a customer also has the recourse to general law. Therefore, in India though there is no specific legislation which deals only with ˜electronic fund transfer™, certain concerns have been dealt with in the Payment and Settlement Systems Act, Rules, Regulations, directions, etc. issued thereunder as well as the provisions of general law.

Chapter 5: judicial decisions

In Umashankar Sivasubramaniam v. ICICI Bank[17], before the Adjudicating authority under Information Technology Act, in Chennai, the complainant alleged that his account was wrongfully debited due to negligence on the part of the bank. ICICI contended that the case refers to phishing and the blame of negligence lies with the customer who would need to file an FIR. The bank also raised the objection that the matter cannot be brought under the purview of IT Act, 2000. The Adjudicating Authority found ICICI bank guilty of the offences under Section 85 read with relevant clauses of Section 43A1of the IT Act, 2000 and directed the bank to pay a sum of Rs. 12 00000.

In ICICI Bank v. Ashish Agarwal,[18] before the State Consumer Forum, Raipur, an appeal was filed against the order of district forum, Raigarh directing the appellant bank to pay Rs. 49,912.36/- which was allegedly not withdrawn by him from his account and also Rs. 5000/- as compensation for the mental agony and Rs. 3,000 as litigation cost on account of deficiency in service. The State Commission, observe that the respondent was negligent in giving information regarding the password to the third person and hence the bank was not liable for deficiency of service.

Needless to say, the banks must keep pace with the appropriate technology if they have to ensure better customer service. The role of EFT systems, as commenced by RBI, has been remarkable in the banking industry. Physical banking is still vital to the growth of banking sector in India and it cannot be done away with, particularly, from the point of view of banker-customer relationship.

[1] M.L.TANNAN, TANNAN’S BANKING LAW AND PRACTICE IN INDIA 520 (23rd ed. 2010)

[2] Rewards and Risks of Big Data, The Global Information Technology Report, 2014

[3] 15 USC 1693 (1798)

[4] K.C.SHEKHAR & LEKSHMY SHEKHAR, BANKING THEORY AND PRACTICE 23, (19 th ed. 2009)

[5] Various Modes of Electronic Fund Transfers, (Sep. 14 2015, 05:40 AM) http://www.itsallaboutmoney.com/conveniencebanking/internet-banking/various-modes-of-electronic-fundstransfers-in-india-neft-rtgs-and-imps/

[6] RTGS (Membership) Business Operating Guidelines, 2004, Chap. 2

[7] Fund Transfer Charges of NEFT, RTGS and IMPS, BUSINESS STANDARD Dec. 10 (2013), http://www.business-standard.com/article/pf/fund-transfer-charges-of-neft-rtgs-and-imps-113121000164_1.html

[8] NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) See http://www.unionbankofindia.co.in/personal_bill_neft.aspx (Sep. 4th 2015, 03:15 PM)

[9] Electronic Banking, FEDERAL TRADE COMMISSION (2012), available at http://www.consumer.ftc.gov/articles/0218-electronic-banking

[10] HOW TO SET UP DIRECT DEPOSIT, https://www.wellsfargo.com/help/direct-deposit/ (Sep. 7th 2015, 07:15 PM)

[11] M.L.TANNAN, TANNAN’S BANKING LAW AND PRACTICE IN INDIA 520 (23rd ed. 2010)

[12] See at 9

[13] CREDIT CARD, http://www.investopedia.com/terms/c/creditcard.asp (Sep. 9th 2015, 08:00 PM)

[14] PUJA ARORA & DEEPAK KUMAR, Role of Information Technology in Banking Sector, E-BANKING IN INDIA- CHALLENGES AND OPPORTUNITIES 92 (1st ed., 2007)

[15] Amartya Bag, Online banking frauds in India: How to recover lost money using Information Technology Act, 2000? , April 18, 2014, Available at http://blog.ipleaders.in/online-banking-frauds-in-india-how-to-recover-lost-money-under-information-technology-act-2000/

[16] M.L.TANNAN, TANNAN’S BANKING LAW AND PRACTICE IN INDIA (23rd ed. 2010)

[17] Umashankar Sivasubramaniam v. ICICI Bank , Civil Jurisdiction Petition No. 2462 of 2008

[18] ICICI Bank v. Ashish Agarwal , Appeal No. 435/2009