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Analysis of Internet Banking Along With Legal Aspects in India Dr. Kavita

The document discusses internet banking in India, including its advantages over traditional banking in terms of convenience and accessibility. It outlines the components of internet banking and covers topics like online transactions, payment gateways, and cyber security issues. The regulatory framework around internet banking in India is also addressed.

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0% found this document useful (0 votes)
106 views17 pages

Analysis of Internet Banking Along With Legal Aspects in India Dr. Kavita

The document discusses internet banking in India, including its advantages over traditional banking in terms of convenience and accessibility. It outlines the components of internet banking and covers topics like online transactions, payment gateways, and cyber security issues. The regulatory framework around internet banking in India is also addressed.

Uploaded by

Sheetal Saylekar
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ANALYSIS OF INTERNET BANKING ALONG

WITH LEGAL ASPECTS IN INDIA


Dr. Kavita*
Abstract
Through the use of Internet banking, the Indian financial
system has the potential to become cashless. Internet banking is
often referred to as “e-banking, online banking, virtual banking”,
or other similar terms. An “electronic payment system” that allows
clients of banks or other Banking organizations to undertake a
variety of financial operations via the web pages of those Banking
organizations is known as a payment gateway. It is possible to
conduct various types of online monetary transactions, collectively
referred to as core banking, including the "Nation Electronic Fund
Transfer (NEFT), Real-time gross settlement (RTGS), Electronic
clearing system (ECS), Immediate Payment Service (IMPS),
Automated Teller Machine (ATM), Smart cards, and Tele
banking". We have the ability to check our accounts at any
moment of the day or as numerous times as we desire using
Internet banking services. The number of online banking scams in
India has skyrocketed in recent years. At present, there is
insufficient Internet banking legislation in India. Even though the
RBI has published some instructions in this area at the most recent
opportunity, they are inadequate to ensure that banks adhere to
rigorous and necessary cyber safety procedures. The paper talks
about the most recent developments in Internet banking, including
cyber security issues, as well as its benefits and downsides. It also
talks about the regulatory framework in place in India to protect
customers from cybercrime and identity theft.
Keywords:Digital banking, fundamental banking, technologies,
computer security, and legal challenges are all topics covered in
this course.

*
Assistant Professor, Law Centre-1, Faculty of Law, University of Delhi, Delhi.
114 Kurukshetra Law Journal [Vol. XI

Introduction
“India has seen a dream of Digital India. From
latest science to latest technology, everything
should be available at the tip of one's finger.” -
Narendra Modi
The banking sector has always played a significant part in
the development of any country's economy. It is essential for
every country since it meets the demands of all parts of society in
terms of credit, regardless of their economic status. The strength
of India's financial system contributes to the country's economic
potential. The introduction of information technology into the
banking sector has drastically transformed the way in which the
banking industry operates. Banks had no choice but to embrace
this new transformation in order to succeed in the new
globalization era. Nowadays, most financial transactions take
place while you are drinking your coffee or on a crucial phone
call. ATMs are just outside your door. Plastic cards outnumber
money notes in your wallet by a factor of three. The introduction
of information technology has played a significant role in this
transformation. In the modern environment, banks must function
in an atmosphere that is extremely transnational, liberalized,
commercialized, and competitive.1

1
Online banking users in India to reach 150 million by 2020 according to a
Study The Financial Express, available at
https://www.financialexpress.com/industry/banking-finance/online-
banking-users-in-india-to-reach-150-billion-by-2020-according-to-a-
study/7310 (last visited Feb 27, 2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 115
WITH LEGAL ASPECTS IN INDIA

Internet Banking
As per the Daniel “Internet banking or E-banking is the
term that signifies and encompasses the entire sphere of
technology initiatives that have taken place in the banking
industry. E-banking is a generic term making use of electronic
channels through telephone, mobile phones, internet etc. for
delivery of banking services and products. Internet banking as the
delivery of bank's information and services by banks to customers
via different delivery platforms that can be used with different
terminal devices such as a personal computer and a mobile phone
with browser or desktop software, telephone or digital television”.
Internet banking is defined by Barron’s Dictionary (2006) as “A
form of banking where funds are transferred through an exchange
of electronic signals between financial institutions, rather than an
exchange of cash, checks, or other negotiable instruments”.
Internet Banking Versus Traditional Banking
The old banking system required a customer to be
physically present at the bank's branch locations for several years
before an account could be opened. Individual to individual
engagement is provided by conventional banking. Conventional
banks have a number of problems, including a set timetable,
unsuitable locations, and a restricted range of financial goods.
When using online banking, the quickest and most convenient way
to start a savings account is to connect it to an already existing
account. It is possible to complete business transactions with a
116 Kurukshetra Law Journal [Vol. XI

single "click." Users may still handle any accounts while


remaining at home since there is no verbal contact required and no
big lines at the counter. When compared to traditional
banking,“internet banking is easier, more convenient, and more
flexible. It also has more services available 24 hours a day, seven
days a week, and” is more flexible2.
Components of Internet Banking
The following are the primary characteristics of electronic
banking:
1. Banking operations are carried out via the use of
the internet.
2. Because it can reach clients at various counters and
jurisdictions, it removes the conventional
geographical restrictions that existed.
3. E-banking makes it possible to conduct financial
transactions at any time and on any day of the
week, especially on vacations and weekends.
4. This development enables the introduction of a
number of novel distribution techniques that are
easier and more cost-effective for both customers
and banking organizations.
5. The utilization of technological devices that save
both time and money for the banker and the
2
Internet Banking – Legal Issues – Rajdeep and Joyeeta
Rajdeepandjoyeeta.com, available at http://rajdeepandjoyeeta.com/internet-
banking-legal-issues/ (last visited Feb 27, 2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 117
WITH LEGAL ASPECTS IN INDIA

customer is a key component of the system's


foundation in technology and research.
6. In this case, it makes sure that the money transfer is
safe, and it also makes sure that the consumer is not
going to be found out and that the money is real.
Advantages of Internet Banking:
Convenience: This would be the absolute most essential
advantage of online banking, and it outweighs any disadvantages.
Performing money transfers from the convenience of one's own
home or workplace at the touch of a button, without ever having to
leave the house, is a convenience that no one would want to do
without. In comparison to visiting the bank to keep a record of
accounts, regular monitoring of accounts on the internet is far
more comfortable and quicker. Even non-transactional services
such as purchasing cheque books online, maintaining accounts,
asking about interest rates for different financial products, and so
on, become considerably more convenient when done over the
internet.
Higher Interest Rates: Because online banking requires less
physical effort on the part of the bank, the banks stand to earn
greatly from the usage of the service. With the reduction in the
need to expand office space and hire additional people to deal with
clients, banks will see a major reduction in their operating costs,
resulting in a net financial benefit. The result is that a percentage
of the savings gained may be passed on to consumers in the form
118 Kurukshetra Law Journal [Vol. XI

of higher interest rates on deposits as well as lower interest rates


on loans, respectively. Most banks provide low or no deposit
accounts for internet banking, as well as reduced penalties for
early withdrawals from Fixed Deposits, in order to promote the
use of the service.
Services: Technology is making it exceedingly simple for both the
bank and the consumer to have access to an incredible number of
amazing services by just signing in. They include financial
management capabilities, properly functioning budgetary and
predicting tools, loan calculators and investment analytical
techniques. These facilities, which are accessible as simple
applications on the bank's website, encompass equity trading
platforms as well as asset analytical techniques as well as loan
calculators. Furthermore addition, most banks now provide the
option of completing tax forms and preparing tax returns on the
internet3.
Mobility: Internet banking has advanced significantly in recent
years, with the introduction of mobile internet banking, which
provides customers with almost limitless mobility, allowing them
to do banking transactions even when on the go.

3
Legal Aspects of Internet Banking in India - International Journal of Law
Management & Humanities International Journal of Law Management &
Humanities, available at https://www.ijlmh.com/legal-aspects-of-internet-
banking-in-india/ (last visited Feb 27, 2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 119
WITH LEGAL ASPECTS IN INDIA

Disadvantages of Internet Banking


Relationships: Online transactions have a negative impact on the
connection that a customer has with their banker, which was
formerly fostered via a typical visit to the branch office. The
manager had a wide range of discretionary rights, such as the
ability to waive punitive interest or service fees, which were often
abused by employees who had a greater understanding of the
company's policies. Additionally, personal contact meant that the
banker would be able to give valuable financial advice and
insights to the consumer, which was useful to them.
Complicated transactions: The presence of complicated
transactions that cannot be resolved without a face-to-face
conversation with a manager, which is not feasible via online
banking, raises the question of whether internet banking is a good
option. Specific difficulties and complaints must be resolved in
person at the bank, and this cannot be accomplished over the
internet. Many complicated service problems cannot be resolved
because online communication is neither clear nor focused.
Certain services, such as notarization and bank signature
assurance, are not available for completion via the internet.
Security: This is the most serious flaw in the online banking
system, and it is the one that the average client must be on the
lookout for. Identity theft is another another major source of worry
for consumers who do all of their financial transactions over the
120 Kurukshetra Law Journal [Vol. XI

internet4. In order to combat identity theft, most banks have made


it essential to post scanned copies of cleared checks on their
websites.
Fourth, trust is the most difficult factor for most people to
overcome when it comes to internet banking. Customers prefer
traditional banking over internet banking due to a lack of
confidence in the security of online transactions. They have the
impression that online transactions are hazardous, and as a result,
fraud may occur. When clients use e-banking services, a number
of questions emerge in their minds, such as: Did the transaction go
through? Is it possible that I pressed the transfer button once or
twice? Trust is one of the most important variables that impact a
customer's desire to do a transaction with a web-based business.
Lack of Customer Awareness: In the Indian context, customer
knowledge of e-banking amenities and processes is still on the low
side. Banks are unable to effectively convey accurate information
regarding the usage, advantages, and capabilities of online
banking services. One of the most significant impediments to the
growth of e-banking is a lack of understanding of new technology
and their advantages5.

4
Criminal Procedure Code 1973
5
Legal issues in internet banking - iPleaders available at
https://blog.ipleaders.in/legal-issues-internet-banking/ (last visited Feb 27,
2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 121
WITH LEGAL ASPECTS IN INDIA

Types of Internet Banking


National Electronic Fund Transfer: One such payment system
is the NEFT, which is a countrywide “payment system that allows
for one-to-one cash transfers between individuals. People,
businesses, and corporations may transfer money digitally from
any bank branch to any other person, company, or corporation
who has an account with any other bank branch in the nation
participating in the scheme”, as long as both parties agree to the
transfer. Transferring cash between individuals, businesses, and
corporations that have accounts with a bank branch is possible
using the NEFT system. It is also possible for people who don't
“have a bank account (walk-in customers) to deposit the money at
Net Banking branches with instructions to transfer payments via
the NEFT system. Such cash remittances, on the other hand,
would be limited to a total of Rs.50,000/-per transaction. As a
result, NEFT makes it possible for originators or remitters to
commence money transfer operations even if they do not have a
bank account. Current NEFT operations are conducted in hourly
batches; there are 12 payments each day on weekdays (Monday
through Friday) from 8 am to” 7 pm, and six settlements per day
on weekends (from 8 am to 1 pm).
Real Time Gross Settlement- RTGS is known as a process (real-
time) settlement of financial transactions that are carried out
individually and order-by-order on a global scale (without
netting). When we say "Real Time," we mean that instructions are
122 Kurukshetra Law Journal [Vol. XI

processed immediately rather than at a later moment; when we say


"Gross Settlement," we mean that wire transfer orders are settled
immediately at the time of receipt, rather than at a later time. A
payment is final and irreversible when it is made since the money
settlement takes place on the records of the RBI. The RTGS is
designed especially for high-value transactions. The RTGS system
accepts payments of up to Rs. 2 lakhs as a minimum. There is no
upper limit to the amount of money that may be sent through
RTGS. To settle client transactions at the RBI, banks may use the
Real-Time Gross Settlement (RTGS) service, which is accessible
to them from 9.00 a.m. to 16.30 p.m. on weekdays and from 9.00
a.m. to 14.00 p.m. on weekends. The banks' operating hours, on
the other hand, may vary based on the hours that their customers
use their bank locations.
Electronic Clearing System:ECS stands for an alternative
approach for effecting money transfers in respect of “utility bill
payments such as telephone bills,” power bills, insurance
payments, card payments, and debt payments, among others, that
eliminates the need for releasing and ability to handle paper
instruments and thereby allows banks, businesses, corporate
entities, and government agencies, among others, to provide better
customer service to those who make the payments.
Immediate Payment Service: IMPS is a cell-phone inter-bank
electronic money transfer system that is accessible 24 hours a day,
7 days a week. According to the Indian Bankers' Association,“
2021] ANALYSIS OF INTERNET BANKING ALONG 123
WITH LEGAL ASPECTS IN INDIA

IMPS is a powerful tool for transferring money instantaneously


between banks throughout India by mobile, internet, and ATM,
and it is not only secure but also cost-effective from both a
financial and non-financial standpoint.”
Legal Issues in Internet Banking in India
India is a member of the World Trade Organization.
Liberalization, globalization, and privatization are the three
fundamental concepts of the World Trade Organization. As a
result, trade and commerce in India have been more liberalized in
recent years. In addition, the financial industry has witnessed
significant changes as well. The introduction of e-banking has
exposed the Indian banking sector to unparalleled competition
from the rest of the world. If the financial industry does not keep
up with technological advances, international commerce will
remain a distant dream. In conjunction with the development of
new technology, the deregulation of the banking sector has made it
possible for new rivals to enter the financial services market in a
timely and efficient manner. As explained below, a number of
legal rules that apply to conventional banking activities are also
relevant to online banking activities. However, this does not
completely resolve the issues, and as a result, more severe
regulations and legislation must be enacted, particularly to address
the issues of electronic banking. The legal basis for banking in
India is given by a number of legislations, including-
 “The Banking Regulation Act 1949,
124 Kurukshetra Law Journal [Vol. XI

 The Reserve Bank of India Act 1934 and


 The Foreign Exchange Management Act 1999
 The Information Technology Act 2002
 The Consumer Protection Act 1986
 The Indian Contract Act, 1872
 The Negotiable Instruments Act,1881
 The Indian Evidence Act 1872”
Smart Card Fraud
According to Indian law, when a person becomes aware
that a questionable transaction has been carried out on his or her
prepaid debit card or credit card, he or she must promptly notify
the card issuer6. It is recommended that you make a complaint
with the bank and, if possible, phone the customer service number
to have the card or account blocked promptly.
How to file a complaint?
It is necessary for the victim to file a complaint regardless
of whether the fraud involves net banking, ATM transactions, or
any other online activity. The person who wants to file a
complaint with the bank must first make sure that he or she has at
least the following documents:
 From the relevant bank statement for the previous
six months,

6
Legal issues in internet banking - iPleaders available at
https://blog.ipleaders.in/legal-issues-internet-banking/ (last visited Feb 27,
2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 125
WITH LEGAL ASPECTS IN INDIA

 a copy of any SMS messages you received in


connection with the claimed transactions; and
 a copy of your identification and address proof as
it appears on your bank records.
 With the above-mentioned papers, you should file a
complaint with your local police station, stating
what happened in detail.
False applications are being circulated in large quantities in
the cyber realm. Any financial fraud done through an app would
need more evidence, like a screenshot of the infected software and
information about where it came from, in addition to the materials
above.
Where to file the complaint?
If you suspect fraudulent activity and have alerted the card
issuer or your bank of the suspicion, you should submit a formal
complaint with the local police station. In order to register a FIR9,
you must go to your local police station. In the event that the
police refuse to file a FIR, the court may be petitioned according
to Section 156(3) of the Criminal Procedure Code. What happens,
though, if the police request that you go to the Cyber Cell to
submit a complaint? It is necessary for the individual to contact
the cyber cell in question. He has the option of filing an FIR at the
local police station. The cases are sent to the Cyber Cell by the
respective police stations. Anyone who desires to file a complaint
with the cyber cell directly, rather than via the police, may do so at
126 Kurukshetra Law Journal [Vol. XI

any time after filing a complaint with the police. The Internet can
be used to find the contact information for a district cyber cell that
is specific to where the person lives.
Responsibility in The Event of a Fraudulent Transaction
When fraud occurs, and the financial institution “is not at
fault, and the fraud was performed by a third party via an act of
scammer, phishing, or other means, the RBI guidelines provide
that the client is not obligated to pay if the breach is disclosed
within 3 days of the fraud transaction taking place. The customer's
per transaction liability will be restricted to the”“transaction value
or an amount established by the Central Bank, whichever is
smaller, if the transaction is reported after that but within seven
days of the first reporting date. Furthermore, if customers wait
more than 7 days”, "the customer's liability shall be determined as
per the bank's board-approved policy," according to the RBI
warning. Following notification to the bank, the resolution process
must be completed within 90 days, according to RBI rules. Ten
business days after a customer tells a bank that an electronic funds
transfer was made without permission, the bank must credit or
cancel that money7.
Suggestions
1. Banks are required to safeguard the confidentiality of their
customers' accounts. The RBI has issued a new circular
7
INTERNET BANKING AND LEGAL REMEDIES Lex life India,
available at https://lexlife.in/2021/07/01/internet-banking-and-legal-
remedies/ (last visited Feb 27, 2022)
2021] ANALYSIS OF INTERNET BANKING ALONG 127
WITH LEGAL ASPECTS IN INDIA

that includes recommendations for reducing the risk of


hacking. The banker is responsible for incorporating
technological advances in order to perform his or her
duties more efficiently. The Reserve Bank of India should
also verify that banks are using the most up-to-date
technologies. The RBI should hire technicians and tell
them to report security breaches in accordance with
security rules.
2. As a result, the auditor hired to alert the authorities
discovered misuse of money at the most minute level.
Because of the lack of detection, the risk of bankers
misusing money has gone up because of electronic
banking.
3. The automatic teller machine (ATM) malfunctions often,
causing trouble for the consumer. It must be said how
many times banks haven't been fined for making mistakes
like this in their next circular. After reaching a certain
threshold, banks are required to pay a penalty, which
serves as a reminder to them to keep an eye on the
machine's operation.
4. The Consumer Protection Act is distinguished by its ability
to provide justice more quickly and at a lower cost.
Furthermore, as previously mentioned, the Act applies to
financial services as well. Especially in cases where ATM
machines don't work very often, security precautions aren't
128 Kurukshetra Law Journal [Vol. XI

taken, and banks charge too much for cash payments, the
Act should be widened to include digital transactions.
However, even though this is covered by the RBI circular,
it is recommended that they be placed within the scope of
the law, which would be more convenient for clients.
Conclusion
Customer resistance to electronic banking continues to
exist among Indian bank customers. Understanding the underlying
causes of this reluctance might be beneficial for bank executives
when developing efforts to encourage more people to utilize
online banking. To keep fraudsters at bay, law enforcement must
go the additional mile when compared to what they are up against
on the battlefield of cybercrime. When it comes to technology, it's
“always a double-edged sword that may be utilized for both good
and negative reasons. According to the preamble of the
Information Technology Act 2000, the Act was created with the
goal of providing legal recognition for transactions carried out
using electronic data interchange and other forms of e-commerce
technology. The Act has also” amended the "Indian Penal Code
(1860), the Indian Evidence Act (1872), the Bankers' Books of
Evidence Act (1891), and the Reserve Bank of India Act 1934" in
order to make legal recognition and control of commercial
operations more accessible to the public. However, although the
goal of the Act is not to repress economic activity, it has specified
specific offenses and penalties to suffocate such omissions, which
2021] ANALYSIS OF INTERNET BANKING ALONG 129
WITH LEGAL ASPECTS IN INDIA

are believed to fall within the category of cybercrimes. Customers'


concerns about security while using e-banking services continue to
be a major source of worry, and the current regulation is
insufficient to address these concerns. It has been difficult to bring
the provisions before a court of law because of a lack of clarity in
the laws themselves. The legal concerns surrounding Internet
banking in India must be taken more seriously by all parties
involved, particularly Indian financial institutions. Indian banks,
on the other hand, won't see a more positive outcome until they
have to follow cyber security rules.

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