How to Cite:

Modi, S., Premani, V., & Kaur, M. (2021). A critical analysis of e-banking frauds and laws
in India. International Journal of Health Sciences, 5(S2), 931–938.
https://doi.org/10.53730/ijhs.v5nS2.13925

A critical analysis of e-banking frauds and laws

in India

Dr. Seema Modi

Assistant Professor, School of Law, Lovely Professional University, Punjab

Ms. Vanshika Premani

Assistant Professor, School of Law, Lovely Professional University, Punjab

Ms. Mandeep Kaur

Assistant Professor, KCL Institute of Laws, Jalandhar

Abstract---The present era is the age of science and technology.

Information communication and technology has a great contribution
to society. It has contributed to all spheres of society. The banking
field is no exception to it. Just because of e-banking, money can be
transferred at any time without waiting for the opening of banks. E-
banking is therefore quite speedy and convenient. However, there is a
drawback to online banking. It isn't completely safe. A significant sum
of money is moved illegally through e-banking scams. A poor ordinary
man makes great efforts to save money for emergency situations, but
e-banking fraudsters employ every malfeasance to make money
quickly and steal from the poor. There are laws in place to regulate it.
True evidence of it may be found in the Information Technology Act of
2000. In addition to that, the Reserve bank also promptly releases
instructions in this respect. In order to address these serious
concerns, a separate complaint cell has been developed. However, it
has been shown that these offences are becoming worse every day.
Therefore, it is important to research it and identify a workable
solution to this problem. The examination of the relevant legislation
and their critical analysis has been the main subject of the
researchers' work. In addition to that, the yearly reports of the
relevant agencies, including the National Crime Report Bureau and
the Internet Crime Complaint Centre, have also been read. The
judiciary has also been paid proper attention to it. After going through
all available material, the researchers have supposed to recommend
some suggestions to carry on e-banking in a more effective and
efficient manner.

Keywords---e-banking frauds, information technology act, financial

transactions.

International Journal of Health Sciences ISSN 2550-6978 E-ISSN 2550-696X © 2021.

Manuscript submitted: 25 Sept 2021, Manuscript revised: 2 Oct 2021, Accepted for publication: 15 Oct 2021
931
932

Introduction

Development of science and technology has transformed almost every activity into
electronic mode. The early 1990s saw the introduction of banking sector reforms.
Up until 1980, banks allowed consumers to conduct banking transactions
through a single channel that is done in person at the bank, and as a result of the
reforms, customers can now conduct financial transactions through a variety of
channels, which is quicker than the manual banking process. Financial
transactions are possible by just a single click.1 The banking industry has seen a
significant transformation thanks to technology. E-banking provides banking
services via electronic channels. Early private sector banks were not fully
computerised, whereas new private sector banks and foreign banks were from the
moment of inception fully computerised.

A system where financial transactions are handled utilising information and

computer technology rather than human resources is known as electronic
banking, or e-banking. E-banking differs from typical banking services in that
there is no direct contact between the bank and its clients. By using several
platforms that may be utilised with a variety of terminal devices, such as a
personal computer and a mobile phone with browser or desktop software,
telephone, or digital television, banks can give information and services to their
customers via e-banking.2 Even if there are a tonne of benefits to e-banking, there
are also a variety of challenges as a result of technical advancement in the
banking industry. Operational hazards, technological problems, security
problems, and legal problems are the main causes of the various difficulties
encountered when using e-banking services. Unauthorized access to data, data
theft by hackers, and data loss or damage by viruses are just a few of the many
security challenges people encounter. In the banking industry, technological
advancement coexists with difficulties. The biggest problem is one that has to do
with security and law. The depository financial institution of India, serving as
regulator and supervisor and taking into account the increase in e-banking fraud
instances, has given instructions to the banks on how to prevent e-banking
frauds from being carried out by the fraudsters. safeguard the frauds and each
now so as per situational changes is making adjustments in guidelines by issuing
new one. Hence To find a solution to the demographic problem that is escalating
in many parts of India and across the border, an analysis of the rules and
regulations relating to e-banking scams is essential. Without widespread support,
laws cannot be carried out. That is supported by the failure to strictly enforce the
legislation and by the observation of e-banking frauds. Fieldwork can get your
hands on problem-oriented ideas that the lawmakers can embrace and fill the
theoretical gaps with in order to avert future financial losses to India and
potential harm to the Indian economy.

1
Dr. C. Gupta and Abhilasha Sharma, Banking Frauds in India: Trends and Legal Challenges,
International Journal of Education, Modern Management, Applied Science & Social Science
(IJEMMASSS), ISSN : 2581-9925, Impact Factor: 6.340, Volume 03, No. 01, January - March,
2021, pp.276-280
2
Mrs. S. Kalpana and Dr. M. Mahalakshmi, Cyber Crime: A Growing Threat to Indian E-Banking
Sector, Journal of Emerging Technologies and Innovative Research, (ISSN-2349-5162), December
2020, Volume 7, Issue 12
 933

Research Objectives

1) To study modern ways of banking fraud in online mode.

2) To evaluate the international law relating to e-banking frauds.
3) To analyze the efficiency and weaknesses of Indian laws relating to e-banking
frauds.
4) To study the reports of concerned international and national bodies, if they are
available.
5) To suggest measures to curb the e-banking frauds in India.

Literature Review

Jaishree Chavan (2013) has pointed out the significance of internet banking. No
doubt, internet banking has made our life convenient. It is cost-effective, time-
saving, speedy and very convenient. Fund management is also very easy through it.
But, along with it, it has its own challenges. The biggest challenge is towards
confidentiality, integrity, and authentication. Regulation and supervision is other
challenges. 3

Jaspreet Singh and Neeta Brar (2012) defines internet banking as a medium
through which banking services are delivered. It is a strategic tool for the growth of
the business. It is widely accepted at the international level. India is gradually
moving towards it. To change the perception of the customers, it is very much
necessary to organize awareness programs and by making the services user-friendly,
proper security, and the best responses to the services offered.4

Neha Dixit and Dr. Saroj K. Datta (2010) have also shown their concern about the
issues relating to privacy and security. Due to lack of knowledge of information
communication and technology, adult customers avoid accepting online banking
services. If security and privacy are ensured, trust is created and level of awareness
is increased, Indian customers will start accepting e-banking services.5

CA Mazrun E. Jokhi (2014) has presented the study done by Reserve Bank of India
(RBI). As per the RBI, there were 1.9 crore credit card users in India till date.
Approximately, Rs. 14,000 crore went through in banking transactions. The online
payment market size has increased with the passage of time. Online shopping is
done not only through the public bank, but via payment gateways of private banks
also.6

3
Internet Banking-Benefits and Challenges in An Emerging Economy, International Journal of
Research in Business Management (IJRBM)Vol. 1, Issue 1, June 2013, 19-26.
4
Internet Banking Need of Current Scenario. INTERNATIONAL JOURNAL OF MANAGEMENT
&Amp; INFORMATION TECHNOLOGY, 1(2), 67–72.
5
Acceptance of E-banking among Adult Customers: An Empirical Investigation in India. Journal of
Internet Banking and Commerce. August 2010, 15(2):1-17
6
Modern Form Of Older Crimes: Computer Related & E- Frauds, Volume 1, Issue 6, November
2014, International Journal of Business Quantitative Economics and Applied Management
Reaearch,Pg. No: 63 to 70
934

Neha Sharma and Dr. Dhiraj Sharma (2017) have properly described the issue with
the use of tables and diagrams. Their study states that even the bank employees do
not take the issues of fraud seriously. They neither have much awareness about it,
nor pay much attention towards the guidelines issued by the RBI. One of its
responsible factors is work pressure. The trained employee may tackle with the
issues efficiently. There must be sufficient staff in the banks, so that the bank
employees do not feel over-burdened. The communication between the staff and
supervisor must be sufficient so that data relating to fraud may be effectively spread.

Upasna Ghosh (2021) has dealt with online financial frauds and cyber laws in India.
She pointed out that the Information and Technology Act, 2000 contains a lot of
confusion and ambiguity. The offences under cyber laws are bailable in nature. They
become non-bailable only when they are combined with the non-bailable offences
mentioned under the Indian Penal Code. Today, spam has become a very big issue,
regarding which India is not having any law.

Research Methodology

For doing the study, the researchers will follow the descriptive method to discuss the
existing legal system. It will be followed by the exploratory method to explore new
mechanisms and systems. Then, the cause-effect relationship will be found out to
suggest the solution to the problem. The doctrinal method will be adopted to do this
study. The data will be collected through secondary sources. For the collection of
data, the researchers suppose to go through the related statutes, judicial decisions,
reports of the committees and guidelines issued by the Reserve Bank of India. If the
need is felt, any other source may also be gone through, like official websites etc.

Indian laws relating to E-banking Frauds

The country's financial needs are believed to be supported by the banking industry.
It makes a significant contribution to the expansion and growth of a country's
economy. This industry has aided in the floatation of currency by encouraging the
general public's savings and investing habits. Banks are the primary foundation of
financial stability, one can readily claim nowadays. It would be fair to argue,
however, that more frauds have been recorded as a result of the expansion of
banking operations and people's reliance on banks to meet their financial demands.
Both traditional and internet scams are among the crimes.

With the advent of technology and digitalization in every sector, life has become
easy. Banking sector just like any other sector has provided a number of
technological options and facilities to its customers. Today much of the work
undertaken by banks has been digitalised. Nonetheless, with the many advantages
technology has brought at the disposal of the banking sector, India has witnessed a
drastic rise of frauds in e-banking transactions. Some most probable reasons for the
rise in e-banking frauds are:

• Rise in online transactions since the last decade.

• Lack of awareness amongst the customers
• Lack of security features
• Illegal Hacking
 935

• Lack of stringent data protection systems installed

• Lack of data protection laws

The relevant laws that provide for the legal framework for banking in India are: the
Banking Regulations Act, 1949, the Reserve Bank of India Act, 1934, and the
Foreign Exchange Management Act, 1999. The Reserve Bank of India is the central
regulatory body which issues license to all the banks. In other words, no banking
institution can function as a bank in India without obtaining a license from Reserve
Bank of India (“RBI”). The power to grant license has been conferred upon RBI under
Banking Regulations Act, 1949. Various types of activities which a bank may
undertake and other prudential requirements are provided under this Act. Accepting
of deposit from public by a non-bank attracts regulatory provisions under Reserve
Bank of India Act 1934. Under the Foreign Exchange Management Act 1999, no
Indian resident can lend, open a foreign currency account or borrow from a non-
resident, including non-resident banks, except under certain circumstances
provided in law. Besides these, banking activity is also influenced by various
enactments governing trade and commerce, such as, Indian Contract Act, 1872, the
Negotiable Instruments Act, 1881, Indian Evidence Act, 1872, etc.7

As per RBI report on Internet Banking, 2001:

“Internet banking is an extension of the traditional banking, which uses Internet
both as a medium for receiving instructions from the customers and also delivering
banking services. Hence, conceptually, various provisions of law, which are
applicable to traditional banking activities, are also applicable to Internet banking.”
However, there has been a lot of questions put to the legality of internet transactions
in particular and use of electronic medium in general The validity of an electronic
message / document, authentication, validity of contract entered into electronically,
non-repudiation etc. are important legal questions having a bearing on electronic
commerce and Internet banking. The report had also doubted the efficiency and
ability of banks in complying with legal requirements concerning secrecy of
customers account, privacy, consumer protection etc. given the vulnerability of data
/ information passing through Internet. There is also inadequacy of law to deal with
situations which are technology driven like denial of service / data corruption
because of technological failure, infrastructure failure, hacking, etc. There are
various jurisdictional issues and conflict of laws of different nations that arise in
cross-border transactions done through Internet.

Amendment to the Indian Penal Code,18608

“After Chapter XXII, the following shall be inserted:
Chapter XXIV
512 - Financial Fraud – Financial fraud means and includes any of the following
acts committed by a person or with his connivance, or by his agent, in his dealings
with any bank or financial institution or any other entity holding public funds;

7
https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=243#ch7 (as visited on
Jan. 10, 2021)
8
https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=248 (as visited on Feb.
25, 2021)
936

a) the suggestion, as a fact, of that which is not true, by one who does not believe
it to be true;
b) the active concealment of a fact by one having knowledge or belief of the fact;
c) a promise made without any intention of performing it;
d) any other act fitted to deceive;
e) any such act or omission as the law specially declares to be fraudulent.

Provided that whoever acquires, possesses or transfers any proceeds of financial

fraud or enters into any transaction which is related to proceeds of fraud either
directly or indirectly or conceals or aids in the concealment of the proceeds of
financial fraud, commits financial fraud.
(f) A', a computer engineer is engaged by a bank to repair the computers. 'A'
transfers funds from the accounts of the customers of the bank by means of
electronically operated system and without any authority from the bank. 'A' is guilty
of financial fraud.

Amendment

513(a) - Punishment for Financial Fraud

Whoever commits financial fraud shall be:

a) punished with rigorous imprisonment for a term, which may extend to seven
years and shall also be liable to fine.
b) (b)Whoever commits serious financial fraud shall be punished with rigorous
imprisonment for a term which may extend to ten years but shall not be less
than five years and shall also be liable for fine up to double the amount
involved in such fraud.

Provided that in both (a) and (b) all funds, bank accounts and properties acquired
using such funds subjected to the financial fraud as may reasonably be attributed
by the investigating agency shall be recovered and restored to the rightful owner
according to the procedure established by law.
Explanation : (1) Public fund means funds collected from public either by deposit or
by issue of equity or loan instruments or through public investment in any scheme
or the Government fund or any amount collected from public otherwise.
Explanation : (2) For the purpose of this section, serious financial fraud means if
and only if, the case (i) involves a sum exceeding Rs.ten crore; or (ii) is likely to give
rise to widespread public concern; or (iii) its investigation and prosecution are likely
to require high specialized knowledge of financial market or of the behavior of banks
or other financial institutions; or (iv) involves significant international dimensions; or
(v) in the investigation of which there is requirement of legal, financial, investment
and investigative skills to be brought together; or (vi) which appear to be complex to
the regulators, banks, Union Government or any financial institution.”

Suggestions

There is no use to explore the issue, if some solutions are not supposed. The Reserve
Bank of India also makes the study time-to-time and makes recommendations.
 937

Those studies have been thoroughly gone through before giving the following
suggestions:

1) Everyone must make sure that all devices and accounts must be password
secured. The password must not be disclosed to anyone in any situation.
2) The most recent versions of an antivirus program and a firewall should be
installed on all computers and laptops.
3) On insertion of ATM card into machine, card skimmers steal the data of the
card. This stolen data is then utilised to make a cloned card. Your account
can be accessed with that copied card. These Skimmers are challenging to
find. Therefore, before inserting your card, you must thoroughly and actively
inspect the device for card skimmers.
4) Before putting a security policy into effect, banks must have a security policy
that has been authorised by the board of directors. The knowledge system
through which e-banking transactions are carried out must be protected by
a separate department, and the data recorded in the system must have high
security.
5) According to RBI guidelines, every Indian bank and foreign bank with a
branch in India must have a separate department that is solely responsible
for managing banking frauds. These departments must also either resolve
any cases that come to the bank's attention or provide guidance to
customers on how their cases can be resolved, the fraudster can be
apprehended, and the money can be recovered.
6) Each bank, financial institution, and intermediary is required to create a
Best Practice Code (BPC) within the time range specified by the regulator for
its officers and personnel in order to offer a detailed rule-based procedural
framework in customer-related situations and the application of judging
power. There must be internal training in this regard. Alongwith it, the
regular inspection must be there to ensure the proper compliance.
7) Banks must inform their clients of the risks associated with utilising online
banking services and the precautions that need be taken to avoid them. The
RBI states that it is the responsibility of the bank to inform its customers
about the precautions that should be taken when utilising internet banking
services. Such information must be available on the bank's online portal.
Additionally, the bank must post such information in a location that is easily
accessible to customers. By sending texts to the mobile number of a
customer registered with the bank, a bank can frequently and promptly alert
its customers about preventive actions.
8) Banks must warn customers about the precautions they should take while
utilising e-banking services. The bank should display this information in a
suitable location where the customer may easily access it.
9) The incentive and promotion policies for the bank offices may be correlated
in some way with the compliance of all rules and regulations made to deal
with e-banking frauds.
10) The CBI and the Police, the investigating authorities, spend an excessive
amount of time to finish an investigation and close a case. Given this, if the
RBI followed up on every single fraud case to its logical conclusion, it would
be dispersing its supervisory resources too thinly. The fraud reporting
system needs to be streamlined in order to avoid duplication of effort and to
938

ensure that only the information required for the Reserve Bank of India to
carry out its regulatory and supervisory duties is reported.
11) A separate statute may be made to criminalise financial frauds, including e-
banking frauds. In the statute, the special procedure may be prescribed to
deal with the cases. It will help in the speedy disposal of cases in more
effective manner.

Conclusion

Online transactions are simple, convenient, and money-saving. These features make
it more popular for individuals to engage in digital fraud. It may be deduced by
interrogating persons of all ages that con artists are constantly looking for ways to
take people's money. Netizens need to handle their personal data with care and be
extra vigilant about their technological rights. Though there are some laws to deal
with e-banking frauds, those laws are not so effective. There is need for a strong and
specific legislation which may particularly deal with e-banking frauds. Information
Technology Act, 2000 may be applied only with the Indian Penal Code, to carry on
the proceeding in case of e-banking frauds. Indian Penal Code does not define the
word ‘fraud’, nor it deals with digital financial frauds. So, making of specific and
independent legislation is direly needed to deal with the problem effectively. The
Reserve Bank of India also makes the study time-to-time and makes
recommendations. In 2001, The Report of its Expert Committee on Legal Aspects of
Bank Frauds was issued, the Chairman of this committee was Dr. N.L. Mitra. He
has also recommended the same. To stop the occurrence of scams, it is also
necessary to raise global awareness, educate people, and promote users' rights.