legal aspects of e-banking in india

8/9/2019 Legal aspects of E-banking in India

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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 – It is Banking using E Channels.

Banking is regulated by RBI under RBI Act

– 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 regulationof 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 electronicdocuments

– E Banking at that time was therefore not

supported by law

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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” throughan RBI circular dated June 14, 2001

– First comprehensive regulatory guidelines on InternetBanking

In March 2003, Negotiable Instruments Amendment Act 2002 was notified

– Introduced the concept of Truncated Cheques andCheques in E Form

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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 EBanking Security released its report – Notified with some changes on April 29 2011

Constitutes the current regulatory guidelines as an extension of IBG 2001

Additionally, Damodaran Committee (August 2011) on CustomerServices and Banking Ombudsman conference (September 2011)have given further operational guidance for E Banking regulation

– These extend IBA guidelines on Customer service and RBI’s BankingOmbudsman scheme

– Regulatory framework of E Banking is therefore derived from all the aboveregulations

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Legal aspects of BankerCustomer 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 theBank 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 ElectronicDocuments

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 – (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 ofthe 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) includingany 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 – 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 thedefence of negligence on his part such as leaving thecheque 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 merenullity. [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 electronicrecord— – First—Who 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 ofthe electronic signature,

– with the intention of causing it to be believed that such document or part ofdocument, electronic record or electronic signature was made, signed, sealed,executed, transmitted or affixed by or by the authority of a person by whom or bywhose authority he knows that it was not made, signed, sealed, executed oraffixed; or

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What is Forgery in E Banking

Secondly—Who, without lawful authority, dishonestly or fraudu-lently, by cancellation or otherwise, alters a document or anelectronic record in any material part thereof, after it has beenmade, executed or affixed with electronic signature either byhimself or by any other person, whether such person be livingor dead at the time of such alteration; or

Thirdly—Who dishonestly or fraudulently causes any person tosign, seal, execute or alter a document or an electronic recordor to affix his electronic signature on any electronic recordknowing that such person by reason of unsoundness of mind or

intoxication cannot, or that by reason of deception practisedupon him, he does not know the contents of the document orelectronic record or the nature of the alteration.

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Legal aspects of Electronicpayment instructions

Electronic payment instructions are a

mandate by a customer to a Bank in their

capacity of the Banker customer relationship – Are in the nature of cheques

– Hence laws of forgery are applicable

E Cheque/Truncated Cheques are – Mirror images of actual cheques

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NIAA 2002

Substitution of new section for Section 6.- – 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 besubstituted, namely:-"Cheque". –

– A "cheque" is a bill of exchange drawn on a specified

banker and not expressed to be payable otherwisethan on demand and it includes the electronic imageof a truncated cheque and a cheque in the electronicform.

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NIAA 2002 Products

Truncated Cheques

Cheques in Electronic form (E-Cheques)


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Truncated Cheques

Defined under the NIAA 2002

– "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 physicalmovement of the cheque in writing


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E Cheque

Defined under the NIAA 2002

– " 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) andasymmetric 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

– Sec 64 (Presentment)

– Section 81 (Possession)

– Section 89 (apparent tenor)

– Section 131 (collecting banker’s responsibility)


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Sec 131 modified

"Explanation II.-It shall be the duty of

– 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

– 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 primafacie proof of such payment."



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Sec 64 modified

"(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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Authentication

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

(1)Subject to the provisions of this section any

subscriber may authenticate an electronic record byaffixing 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 initialelectronic 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

– Only the digital certificate can be seen It is a variable

– 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

–

Authentication – Data Integrity

Optional

– Confidentiality Naavi27


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Technology Behind Digital Signatures

Components of Digital Signature

– Hash Algorithm

To Ensure Data Integrity

– Encryption through Asymmetric Cryptography

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

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Hash Asymmetric

Crypto-

System

Digital Signature System


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Technology Behind DigitalSignatures…3

Hashing Ensures Data Integrity

– Document has not been changed since it has

been signed

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Hash Asymmetric

Crypto-

System



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Technology Behind DigitalSignatures…4

Asymmetric Crypto System

– Provides a means for identifying who has signed

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Hash Asymmetric

Crypto-

System



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Digital Signature Definition

Digital Signature

– Of a document of a person – Is

– The hash value of the document encrypted with theprivate 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 privatekey 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

..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? – JZBENXupUuV88lt2MlvSUEdLJKarJ+8PhLcsHd

CzVpGkoT290X/PK49scyuRNydTnwgWcjI/D/i9vOcElmtC3D/7R1Ip2Z7DJ+Z5Yhkqv+fhXmARxj+xwYEP1MfGxMv7HVHJzRdZAuTRqdXMuDbfgTWnp18QX1Up5KUXfYgi1kQ=

This is how the digital signature looks like – (hexa decimal representation)

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How does a Digital Signature look like?

01001010 01011010 01000010 01000101 01001110 01011000 01110101 01110000 01010101 0111010101010110 00111000 00111000 01101100 01110100 00110010 01001101 01101100 01110110 0101001101010101 01000101 01100100 01001100 01001010 01001011 01100001 01110010 01001010 0010101100111000 01010000 01101000 01001100 01100011 01110011 01001000 01100100 01000011 0111101001010110 01110000 01000111 01101011 01101111 01010100 00110010 00111001 00110000 0101100000101111 01010000 01001011 00110100 00111001 01110011 01100011 01111001 01110101 0101001001001110 01111001 01100100 01010100 00001101 00001010 01101110 01110111 01100111 0101011101100011 01101010 01001001 00101111 01000100 00101111 01101001 00111001 01110110 0100111101100011 01000101 01101100 01101101 01110100 01000011 00110011 01000100 00101111 0011011101010010 00110001 01001001 01110000 00110010 01011010 00110111 01000100 01001010 0010101101011010 00110101 01011001 01101000 01101011 01110001 01110110 00101011 01100110 0110100001011000 01101101 01000001 01010010 01111000 01101010 00101011 01111000 01110111 0101100101000101 01010000 00110001 01001101 01100110 01000111 01111000 01001101 01110110 0011011100001101 00001010 01001000 01010110 01001000 01001010 01111010 01010010 01100100 0101101001000001 01110101 01010100 01010010 01110001 01100100 01011000 01001101 01110101 0100010001100010 01100110 01100111 01010100 01010111 01101110 01110000 00110001 00111000 0101000101011000 00110001 01010101 01110000 00110101 01001011 01010101 01011000 01100110 0101100101100111 01101001 00110001 01101011 01010001 00111101

– A binary representation

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Prerequisites

Digital Certificate issued by a licensed Certifying

authority

– Provides Encryption Key pair through a software

– Provides Mapping of Digital Identity to Physical Identity – Enables Distribution of Public key of the signer

Appropriate Application to use the Digital Signature

– 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 ofthe Court.

– The Act provides three alternative methods forrecovery of non-performing assets, namely: -

Securitisation Asset Reconstruction

Enforcement of Security without the intervention of theCourt

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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 infull within 60 days from the date of the notice.

– To give notice to any person who has acquiredany of the secured assets from the borrower tosurrender 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 representationor raises any objection, – Authorised Officer shall consider such representation or objection carefully and

if he comes to the conclusion that such representation or objection is notacceptable or tenable, he shall communicate the reasons for non acceptanceWITHIN ONE WEEK of receipt of such representation or objection.

A borrower / guarantor aggrieved by the action of the Bank can file anappeal 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 takerecourse to one or more of the following measures: – 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 2007and 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 andall 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., 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 26and 30 of the PSS Act, 2007).

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NEFT

System of transfer of funds between bankswhere the settlement is on “Net” basis atperiodical intervals – hourly batches –

twelve settlements from 8 am to 7 pm on week days andsix settlements from 8 am to 1 pm on Saturdays

Settlement on the same day or the next day depending onthe time of transaction

Maximum per transaction 50000/- no othermaximum or minimum criteria

Available in around 80000 branches

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RTGS

System where settlement happens instantly betweenBanks unlike NEFT where the settlement is on “Net”basis at periodical intervals.

– The beneficiary bank has to credit the beneficiary's accountwithin two hours of receiving the funds transfer message.

– Available between 9.00 hours to 16.30 hours on week days andfrom 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 BankMobile 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

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

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ECS

Electronic Clearing Service (ECS) is a retail payment system that can beused to make bulk payments / receipts of a similar nature especially whereeach individual payment is of a repetitive nature and of relatively smaller amount. T

his facility is meant for companies and government departments tomake/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 publicsector banks in other centres.

The ECS is further divided into two types – ECS (Credit) to make bulkpayments to individuals/vendors and ECS (Debit) to receive bulk utilitypayments 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

Society for Worldwide Inter-bank Financial Telecommunication,HQ La Hulpe, Brussels, Belgium

Provides reliable, fast tele-communication facilities for exchangeof financial messages all over the world between Banks and FIs

As non-profit making co-operative society in 1973 by 239 banks in15 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...

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 – fraud-free – faster – accurate – confidential –

funds/LCs/Guarantees

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Eft Cheques of ICICI

ICICI Bank eftCheques app

– 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 –

– Issue an eftCheque to a mobile number of your choice

Deposit Cheque –

– Deposit scanned image of physical cheque issued to you

Cheque Query –

– Check the status of physical cheques issued to / from your

account

eftCheque History –

– Check past debit transactions done through eftCheques

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Issuing an eft Cheque

Prerequisite

– 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

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

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

1. Cheque Code

2. Pass code sent to issuer of the Cheque

3. If it is a Non-ICICI Bank Account, willneed the IFS code that is available in the

cheque book

4. Account Number

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Summary

New Instruments…New way of doing

Banking business…

– 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: [email protected]

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