Electronic Funding in India: The Legal Framework

corporatelawreporter.com/2015/09/19/electronic-funding-india-legal-framework/
Introduction
Information and Technology has revolutionised the entire world. It has not left any stone unturned in
computerising almost every system in the world. And its 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, days 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. EFTs 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 ones own account.

Transferring funds between two accounts by issuing a credit instruction to ones 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 isnt 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 banks 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 beneficiarys name; his/her account number,
receivers 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,
recipients bank name, a valid account number belonging to the recipient and his respective
banks 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 employees bank. Once
arrangements have been made, the employer automatically transfers employees 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.

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 payees
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 companys 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 individuals 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 institutions 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
dont 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 holders 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 travellers 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.

ELECTRONIC FUNDS TRANSFER Electronic Funds are of two types i.e. credit and
debit transfers.
A credit transfer is called push of funds by the payer to the payee. The payer
instructs the bank to debit his account and cause the account of payee, at the same
bank or another, to be credited. In Electric Clearing Scheme (ECS) credit a series of
electronic payment instructions are generated to replace paper instruments. The
system works on the basis of one single debit transaction triggering a large number
of credit entries. These credits or electronic payment instructions which possess
details of the beneficiarys account number, amount and bank branch, are then
communicated to the bank branches through their respective service branches for
crediting the accounts of the beneficiaries either through magnetic media duly
encrypted or through hard copy. User instructions, usually corporate bodies/
government departments, which have to affect payments to large number of
beneficiaries, submit details of payments in magnetic media to the bank managing
the clearing house, through a sponsor bank. The user institutions are required to
obtain mandates from beneficiaries, for clearing their accounts under ECS. The
corporate bodies too should, on their own, advise the beneficiaries about the due

date of credit under ECS. ECS Debit envisages a large number of debits resulting in
a single credit simultaneously. ECS debit works on the principle of pre-authorized
debit system under which the account holders account is debited on the appointed
date and the amounts are passed on to the utility companies. The scheme thus
facilitates: 1. Faster collection of bills by companies. 2. Better cash flow
management; and 3. Eliminates the need to go to collection centers/ designated
banks by the customers.
ATM (Automated Teller Machine) ATM machines are electronic terminals that permit
you to bank at almost anytime to withdraw cash, or to transfer funds. To operate the
ATM Card provided by the banks, it has to be inserted into the slot in the ATM and
PIN (Personal Identification Number) has to be entered and then the machine
dispenses the cash or carries out other functions like balance enquiry, funds
transfers, etc.. Verification of the customers PIN is a vital part of the ATM security.
Presently most ATMs are online i.e. they are directly linked to the banks central
computer. It allows the PIN inserted by the computer to be compared with a PIN
stored on the banks central computer. PIN is not stored on the computers card. If
there is an error on the part of the customer to enter PIN, the ATM will capture the
card which can be retrieved by the customer in accordance with each banks
procedures. PHONE BANKING Electronic transactions also take place through Mobile
banking. Mobile banking uses SMS facility to alert customers about actions based on
mobile instructions. Some of the recent initiatives undertaken to address potential
security risks for mobile banking and home content access are: (i) smart phone
access based on SIM authentication; (ii) (RF) ID (Radio-Frequency Identification)
based authentication, based on SIM stored user name/password; (iii) PC based
access with user name/password; and (iv) PC based access through mobile phone
presence.
DEBIT CARDS Debit Card is a card issued by a bank that can be used like a credit
card for making payments at any establishments that are called Point of Sale (PoS).
The process is that as soon as the card is swiped at the processor, your bank
account is connected by the network system (terminal) and the amount that you
have expended is debited and credit is given to the PoS establishment. It is instant
is a sense for everybody i.e. purchaser, seller and both their banks.
CREDIT CARDS Banks also issue credit cards. In this operation, when the payment is
made, the card has to be tendered to the PoS. the card is processed at the network
and if everything is in order, the authorization slip is printed. You are then expected
to sign the same. Your signature should be similar to the one on the Credit Card
itself. You make payment when the statement arrives. credit card transaction the
purchaser gets credit but the seller gets his payment from the card issuer upon
submission of counter-signed slips. It is also a kind of EFT.
CHAPTER 2: DEVELOPMENT OF LAW IN INDIA AND THE ROLE OF RBI IN FOSTERING
ELECTRONIC BANKING The first initiative taken in relation to electronic banking in

India was way back in 1998. The Reserve Bank of India (RBI) with the assistance
of Department for International Development (DFID), UK, the upgraded its
supervisory system and adapted its supervisory functions to the computerised
environment in 1998. It also issued guidelines on risks and control in computer and
telecommunication system, advising the banks to evaluate the risks inherent in the
systems and put in place adequate control mechanisms to address these risks.
Three broad categories of risks were addressed, viz., IT environment risks, IT
operations risks and product risks. In India, the law governing electronic banking
has developed in such a manner that the existing banking law principles have been
applied to electronic banking as well. Apart from also enacting new law such as the
Information Technology Act, 2000 which generally govern IT processes, the
traditional banking law and regulations have been extended to electronic
transactions as well. RBI has also clarified that the 1998 Guidelines apply to internet
banking. In addition to these, in 2001 the RBI issued specific guidelines on internet
banking based on the recommendations of a Working Group set up for the same
purpose. The Working Group had focused on three major areas of internet banking,
i.e., (i) technology and security issues, (ii) legal issues and (iii) regulatory and
supervisory issues. The existing regulatory framework over banks has also been
extended to internet banking. It must also be noted that Virtual banks, which have
no offices and function only online are not permitted to offer e-banking services in
India and only banks licensed under the BRA and having a physical presence in India
are allowed to offer such services. Further, banks are required to report to the RBI
about every breach or failure of security systems and procedures in internet
banking, while the RBI at its discretion may decide to commission special
audit/inspection of such banks.

As regards the credit card business of banks, based on the recommendations of the
Working Group on Regulatory Mechanism for Cards, RBI has also issued circulars
regulating credit card operations of banks/NBFCs. These guidelines require banks
and NBFCs issuing credit cards to do the following among other things: adopt the
Fair Practices Code of Conduct issued by the IBA in March 2005, have a well
documented policy, provide information, instruction and bills clearly and timely to
customers, have independent risk assessment, ensure confidentiality of private
information, take responsibility of acts of their agents, establish a grievance
redressal machinery with periodic review of complaints and avoid unnecessary
harassment and intimidation of customers. Thus, the regulation attempts to do two
major things:- a) it attempts to regulate credit card operations in fiscal terms by
regulating the amount of credit that can be issued, persons to whom credit can be
issued, etc. b) it attempts to protect the rights of the consumer by requiring
adequate disclosure of possible liabilities and regular billing. It must be noted that
banks no longer need any prior approval of the RBI for offering the internet banking
services. Nevertheless, banks must have their internet policy and they need to
ensure that it is in line with parameters as set by the Working Group on Internet
Banking in India in 2001. Considering the scope for fraud in e-transactions and the
inherent lack of security, the RBI has not only issued guidelines for secure e-banking

but also advises the banks from time to time on control mechanisms to combat
frauds. A Fraud Reporting and Monitoring System (FRMS) was introduced in 2003 to
enable banks to report data relating to frauds in electronic form. This was done
keeping in mind that timely reporting of information on occurrence of frauds helps in
disseminating the same to other banks which helps in curbing further perpetration
of fraud by the fraudsters. The FRMS Package was revised in January 2006 to
capture granular details of frauds under different categories, viz., housing loans,
credit cards, ATM-debit cards and internet banking, so as to discern the emerging
trends in frauds and enable the entities to focus their oversight on more vulnerable
areas.
In addition to the above the RBI has also been working consistently for the
consolidation of electronic payment and settlement systems such as Real Time
Gross Settlement (RTGS), Indian Financial Network (INFINET), Electronic Clearing
Scheme (ECS), National Electronic Funds Transfers (NEFT), National Settlement
System, etc which are the backbone of electronic transactions. Another
development in relation to electronic banking is Cheque Truncation System which
is a method of payment processing whereunder movement of the paper instrument
is truncated by substituting with electronic transmission of the cheque details or
data. It reduces transaction costs for banks as well as customers. Moreover, banks
also have the additional advantage of much reduced reconciliation problems and
incidents of clearing frauds. In order to ensure that banks are ready with the desired
infrastructure well in time, detailed guidelines were issued to banks on the
hardware/ communication requirements. Also, the definition of presentment and
cheque under the Indian Negotiable Instruments Act, 1881 have been amended to
include electronic presentment of cheques. Thus, it can be seen that the increased
usage of electronic banking channels by banks in India has led to a shift in the RBI
Policy. RBI is gradually moving away from micro-management of IT related matters
of banks and has begun to frame guidelines and standards which relate to common
inter-bank requirements. In July 2005, the Financial Sector Technology (FST) Vision
Document, 2005-08 was released to all banks. This document outlines the approach
to be followed by the RBI as far as IT implementation for the immediate future is
concerned. In July 2006, it was decided that prior approval of the RBI would not be
required for offering internet banking services, subject to fulfilment of certain
conditions. On August 22, 2006, banks were permitted to offer internet based
foreign exchange services, for certain transactions, in addition to the local currency
products already allowed to be offered on internet based platforms, subject to
certain conditions. The legal regime governing banking in India has been
transformed due to the increased incidence of electronic banking in India. Even the
development of IT law in India has been such as to give legal recognition to
electronic transactions so long as certain prescribed stipulations are fulfilled. Thus,
it can be seen that the development of law governing electronic banking in India
has essentially been geared towards the fostering of electronic banking in a sound,
safe and secure manner while protecting the interests of the banks customers.

Legal framework

The different segments of the financial system and the activities of financial
intermediaries are governed and regulated by various statutes that indirectly affect
the payment and settlement systems. Some of the enabling legal framework is in
the form of rules and regulations that, though not legally codified, are enforceable
due to their contractual nature. Some of these laws and regulations are briefly
explained below.
Under the provisions of the RBI Act, the RBI, as the central bank of the country, is
the sole authority for the issue of currency notes. The act also empowers the central
bank to frame regulations for clearing houses. Through an amendment to this act,
the RBI was empowered to make regulations in respect of fund transfers through
electronic means between banks or between banks and other financial institutions.
The Foreign Exchange Management Act 1999 (FEMA) was enacted to promote the
orderly development and maintenance of Indias foreign exchange market. FEMA
confers powers on the RBI to regulate, inter alia, foreign currency payments into
and out of India. The Banking Regulation Act, 1949, provides the legal basis for all
the activities that can be undertaken by banks in India. It is applicable to all
institutions that receive deposits repayable on demand or otherwise, for lending or
investment.
The Act confers powers on the RBI to regulate the banks in the country and thus the
clearing houses managed by banks, to inspect the books and accounts of banks and
to call for periodical financial reports and data from the banks. Non-bank institutions
accepting deposits and other financial institutions are also governed and regulated
under the RBI Act, 1934. The Negotiable Instruments Act, 1881 (NI Act), defines
promissory notes, bills of exchange and cheques. After the enactment of the
Information Technology Act, 2000, amendments were made to the NI Act to provide
for electronic cheques and cheque truncation. The Information Technology Act,
2000, provides the legal basis for activities related to electronic transaction
processing. It also stipulates the security features that are necessary to maintain
the confidentiality, integrity and authenticity of such transactions. It provides
legality for digital signatures and encryption of data and enables electronically
stored information to be equivalent to documentary evidence in a court of law. The
Indian Contract Act, 1872, sets forth the principles of contracts in India. Agreements
entered into by parties, including their mutual rights and obligations, are governed
by the Indian Contract Act. Clearing systems are governed by the Uniform
Regulations and Rules for Bankers Clearing Houses (URRBCH).
The URRBCH cover all aspects related to the function and operation of clearing
houses, such as membership criteria, suspension from or termination of
membership and the procedures related to clearing and settling claims among
members. Individual clearing systems, such as the cheque clearing system,
electronic clearing service and electronic funds transfer system, operate under the
governing covenants of these regulations and rules as adopted by each clearing
house. Originally, the URRBCH and each systems local procedural guidelines were
contractually agreed between the clearing house and its members. This is no longer
the case with the URRBCH, as these contracts now have legal recognition under the
Payment and Settlement Systems Regulations, 2008. These regulations, together

with the Payment and Settlement Systems (PSS) Act, 2007, came into effect in
August 2008. The PSS Act specifies that no person, other than the RBI, shall operate
a payment system except with an authorisation issued by the RBI (unless
specifically exempted by the terms of the PSS Act). The Act provides for netting and
India settlement finality and vests formal oversight powers over all payment and
settlement systems with the RBI.
In summary, the Act: designates the RBI as the authority that regulates payment
and settlement systems; makes it mandatory to obtain RBI authorisation to
operate a payment system;9 empowers the RBI to regulate and supervise
payment systems by determining standards and calling for information, regular
reports, documents etc; empowers the RBI to audit and conduct on- and off-site
inspections of payment systems; empowers the RBI to issue directives; and
provides for netting and settlement to be final and irrevocable.
In addition to the Payment and Settlement Systems Act, 2007, five other laws have
an important influence on securities markets and securities settlement systems. The
Securities and Exchange Board of India Act, 1992, provides for the establishment of
a board (the SEBI) to protect the interests of investors in securities and promote the
development of securities markets. It also confers powers on the SEBI to regulate
the securities market by registering and regulating all market entities such as stock
exchanges and depositories, to conduct enquiries, audits and inspections of such
entities and to adjudicate offences under the act. Sections 20 and 21A of the RBI
Act mandate the RBI to act as a debt manager to the central and state
governments. Earlier, the Public Debt Act, 1944, provided the framework for
regulating transactions in the government securities market.
This act was superseded by the Government Securities Act, 2006 (GS Act 2006),
from 1 December 2007. Some of the significant changes brought about by the GS
Act 2006 are legal recognition to lien, pledge and hypothecation of government
securities; simpler procedural formalities with regard to transfer of title in the event
of the death of the title-holder; and legal recognition for Constituent Subsidiary
General Ledger (CSGL) accounts. Section 45W of the RBI Act empowers the RBI to
regulate, determine policy and give directions to all or any agencies dealing in
securities, money market instruments, foreign exchange, derivatives or other such
instruments as the RBI may specify. The Securities Contract Regulations Act, 1956
(SCRA), confers powers on the government of India to regulate and supervise all
stock exchanges and securities transactions. This act also applies to government
securities. The central government has delegated its powers under the act to the
RBI. These powers relate to contracts in government securities, money market
securities, gold-related securities and derivatives, as well as repurchase agreements
in bonds, debentures, debenture stock, securitised debt and other debt securities.
All other segments of the securities market are regulated by the SEBI through
powers conferred on it by the Securities and Exchange Board of India Act and the
SCRA and through powers delegated to it by the central government under the
SCRA. The Depositories Act, 1996, paved the way for the establishment of securities
depositories that support the electronic maintenance and transfer of ownership of

securities in a dematerialised form, facilitating faster settlement in the securities

market.
Recent developments
Removal of charges for payment services The RBI has waived the processing charge
levied on banks for ECS, NEFT and RTGS transactions until March 2011 to encourage
the use of electronic payments and allow banks to pass on the benefit to the
customers. Similarly, the limits on the size of ECS and NEFT transactions were
removed in November 2004 to increase the user base. 2.3.1 Rationalisation of
service charges The RBI has advised all banks of a framework for service charges.By
this code, customers should not pay any charge for using the ATMs of their own
bank. The use of a different banks ATM is free up to the first five transactions (of
any type, financial or non-financial) in a month, with subsequent transactions being
charged (the charge not to exceed INR 20). Under Section 18 of the Payment and
Settlement Systems Act, 2007, the RBI has also issued a directive on the charges
that banks can levy for various electronic products and for cheque collection
services.
Mandatory use of electronic mode of funds transfer
An RBI directive has made it mandatory to route payments of INR 1,000,000 or
more between RBI regulated entities and markets through electronic payment
systems.
Internet/mobile phone banking
Many banks offer internet banking services, which include access to account
information as well as funds transfers between accounts, bill payments and online
securities trading. The growing number of internet users and widening reach of
internet services will have a significant impact on the way credit transfers are
carried out. Broader usage of mobile phones has encouraged banks and non-banks
to develop new payment services for their customers, usually in cooperation with
mobile service providers. Although other countries have adopted mobile phonebased technologies as a way of delivering access to financial services to a broader
segment of the population, India has opted for a bank-led model. The rapid growth
in mobile phone banking prompted the RBI to issue a set of operating guidelines for
banks in October 2008. For this purpose, mobile banking transactions are defined
as banking transactions initiated by bank customers using their mobile phones that
involve credits or debits to their accounts. The guidelines were relaxed in December
2009 to allow mobile banking transactions up to INR 50,000, both for e-commerce
and money transfers. Banks are also permitted to provide money transfer facilities
of up to INR 5,000 from a bank account to beneficiaries without bank accounts. In
such cases, cash can be paid out at an ATM or a banking correspondent. By value,
funds tranfers account for a much larger share of mobile phone transactions than
payments for goods or services. By volume, the reverse holds true. Final settlement
of mobile banking transactions is made in central banking money.
Remittance services

The flow of inward remittances into the country has increased with the number of
people migrating abroad for work. Such remittances are regulated by the RBI.29
Remittances are received mainly through banks. In order to facilitate the faster
receipt of funds by residents, the RBI permits money transfer agents to handle
inward transfers, but not transfers out of the country.30 Inward cross-border
remittance services are offered by various money transfer agents and post offices.
Agents must be authorised under the PSS Act to provide these services to Indian
recipients.
Role of intermediaries
Electronic and online payment channels, which are increasingly popular for bill
payments or online shopping, generally involve the use of intermediaries such as
aggregators and payment gateway service providers. Platforms for such payments
are also provided by electronic commerce and mobile commerce (e-commerce and
m-commerce) service providers. The RBI has issued guidelines that safeguard the
interests of customers and seek to ensure that their payments are duly accounted
for by intermediaries,31 so that transactions are completed in a safe and orderly
way. The RBI stipulates that all accounts opened and maintained by banks for
facilitating collection of payments by intermediaries from customers of merchants
are to be treated as internal accounts of the banks.