PROJECT

SUBJЕCT: BANKING AND INSURANCE LAW

TOPIC: An Analytical Study on E-Banking in India

Submitted To : Submitted By :
Dr. Shashank Shekhar Shurbhi Yadav
Assistant Professor (Law) Sem. VI, B.A.L.L.B. (H)
Dr. RMLNLU, Lucknow Enrollment No.- 160101147
 Acknowledgement

I would like to take this opportunity to thank Dr.Shashank Shekhar, without whose valuable
support and guidance, this project would have been impossible. His excellent teaching guidance
and steadfast support have been invaluable and ensured the completion of this project.

Of course, I never would have been able to conduct this study or write this final draft of my
project without the assistance provided by the library staff and would also like to thank the
library staff for having put up with my persistent queries and having helped me out with the
voluminous materials needed for this project.

Furthermore, I would also like to thank and show my deepest appreciation towards my seniors
for having guided me and culminate this acknowledgement by thanking my friends for having
kept the flame of competition burning, which spurred me on through the days and I am also
indebted to my various batch-mates, all of whom took on extra responsibilities to allow me the
time needed to document my findings and share them here, to whom I owe some special thanks.
Table of Contents
INTRODUCTION 4

DEFINITION OF E-BANKING 4

SALIENT FEATURES OF INTERNET BANKING 4

FUNCTIONS OF INTERNET BANKING 5

INTERNET BANKING IN INDIA 5

HIGHEST INTERNET USER COUNTRIES IN THE WORLD 6

USE OF INTERNET BANKING IN INDIA FOR LAST FEW YEARS 6

SERVICES THROUGH E-BANKING. 7

ADVANTAGES 8

DIFFICULTIES 9

LEGAL ISSUES 9

SUGGESTIONS 10

CONCLUSION 10

BIBLIOGRAPHY 11

PRIMARY RESOURCES 11

SECONDARY RESOURCES 11
Introduction

Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India a government-owned bank that traces its origins
back to June 1806 and that is the largest commercial bank in the country. Central banking is the
responsibility of the Reserve Bank of India 1935 formally took over these responsibilities from
the then Imperial Bank of India, relegating it to commercial banking functions. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969
the government nationalized the 14 largest commercial banks; the government nationalized the
six next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks
(that is with the Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public-sector banks hold over 75 percent of
total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.1

Definition of E-Banking

E-Banking is defined as the automated delivery of new and traditional banking products
and services directly to customers through electronic, interactive communication channels, E-
banking includes the systems that enable financial institution customers, individuals of
businesses, to access accounts, transact business, or obtain information on financial products
and services through a public or private network, including the Internet. Customers access e-
banking services using an intelligent electronic device, such as a personal computer, personal
digital assistant, automated teller machine, Touch tone telephone. While the risks and controls
are similar for the various e-banking access channels, this booklet focuses specifically on
Internet-based services.2

Salient Features of Internet Banking

The salient features of Internet Banking in India enlisted below

 Easily adoptable by customers.

 Easy to deploy and maintains.
 Cost effective solution.
 Enables the bank to reach its customers on the net.
 Reduce rush at the counters of the bank.
 Enables the customers of the bank to access information from anywhere and at any time.

1
http://www.mondaq.com/india/x/20687/Internet+Banking+in+India

2
https://www.mbainfoline.com/Articles%20on%20Management/-
%20New%20Folder/B%20An%20Analytical%20Study%20on%20E-Banking%20in%20India.htm
  Balance and transaction history search.
 Transaction history export.
 Order new statements.
 Mobile banking Transfers.
 Pay bills with BPA.
 Receive bills online with BPAY view
 Pay anyone payments.
 Multi payments.
 SMS banking services

Functions of Internet Banking

The following are the main function of internet banking in India

 Issue Demand Drafts online

 Transfer funds to own and third party accounts
 Credit beneficiary accounts using the VISA Money Transfer, RTGS/NEFT feature
 Generate account statements
 Setup Standing Instructions
 Configure profile settings
 Use e Tax for online tax payment
 Use e Pay for automatic bill payments
 Interface with merchants for railway and airline reservations
 Avail DEMAT and IPO services

Internet Banking in India

 The Reserve Bank of India constituted a working group on Internet Banking. The group
divided the internet banking products in India into 3 types based on the levels.

 Information Only System: General purpose information like interest rates, branch
location, bank products and their features, loan and deposit calculations are provided in the
banks website. There exist facilities for downloading various types of application forms.
The communication is normally done through e-mail. There is no interaction between the
customer and bank's application system. No identification of the customer is done. In this
system, there is no possibility of any unauthorized person getting into production systems
of the bank through internet.
  Electronic Information Transfer System: The system provides customer- specific
information in the form of account balances, transaction details, and statement of accounts.
The information is still largely of the 'read only' format. Identification and authentication
of the customer is through password. The information is fetched from the bank's application
system either in batch mode or off-line. The application systems cannot directly access
through the internet.

 Fully Electronic Transactional System: This system allows bi-directional capabilities.

Transactions can be submitted by the customer for online update. This system requires high
degree of security and control. In this environment, web server and application systems are
linked over secure infrastructure. It comprises technology covering computerization,
networking and security, inter-bank payment gateway and legal infrastructure.

Highest Internet User Countries in the World

India is the fourth largest internet user countries in the world. The reach of internet banking has
also increased in India due to the internet usage increase.

Use of Internet Banking in India for last few Years

The number of internet banking users has increased from 9% in 2003 to 50% in 2010 due to increase in
internet services. Multiple services can be offered through online banking such as – bill payment
services, Fund transfer, railway ticket booking etc.
Internet banking is changing the banking industry and is having the major effects on banking
relationships. The net banking thus, "now is more of a norm rather than an exception in many developed
countries" due to the fact that it is the economical way of providing banking services. Banking is now
no longer confined to the traditional brick and mortar branches, where one has to be at the branch in
person, to withdraw cash or deposit a cheque or request a statement of accounts. There is need to scan
and analyse the market and respond to the needs of customers and to generate awareness regarding
advantages of internet banking.

AUTOMATED TELLER MACHINE

ATM is designed to perform the most important function of bank. It is operated by plastic card
with its special features. The plastic card is replacing cheque, personal attendance of the
customer, banking hours restrictions and paper based verification. There are debit cards. ATMs
used as spring board for Electronic Fund Transfer. ATM itself can provide information about
customers account and also receive instructions from customers - ATM cardholders. An ATM
is an Electronic Fund Transfer terminal capable of handling cash deposits, transfer between
accounts, balance enquiries, cash withdrawals and pay bills. It may be on-line or 0ff-line. The
on-line ATN enables the customer to avail banking facilities from anywhere. In off-line the
facilities are confined to that particular ATM assigned. Any customer possessing ATM card
issued by the Shared Payment Network System can go to any ATM linked to Shared Payment
Networks and perform his transactions.
CREDIT CARDS/ DEBIT CARDS

The Credit Card holder is empowered to spend wherever and whenever he wants with his Credit
Card within the limits fixed by his bank. Credit Card is a post paid card. Debit Card, on the
other hand, is a prepaid card with some stored value. Every time a person uses this card, the
Internet Banking house gets money transferred to its account from the bank of the buyer. The
buyers account is debited with the exact amount of purchases. An individual has to open an
account with the issuing bank which gives debit card with a Personal Identification Number
(PIN). When he makes a purchase, he enters his PIN on shops PIN pad. When the card is
slurped through the electronic terminal, it dials the acquiring bank system - either Master Card
or VISA that validates the PIN and finds out from the issuing bank whether to accept or decline
the transactions. The customer can never overspend because the system rejects any transaction
which exceeds the balance in his account. The bank never faces a default because the amount
spent is debited immediately from the customers account.

SMART CARD

Banks are adding chips to their current magnetic stripe cards to enhance security and offer new
service, called Smart Cards. Smart Cards allow thousands of times of information storable on
magnetic stripe cards. In addition, these cards are highly secure, more reliable and
perform multiple functions. They hold a large amount of personal information, from medical
and health history to personal banking and personal preferences.

Services through E-Banking.

1. Bill payment service

You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance
premium bills as each bank has tie-ups with various utility companies, service providers and insurance
companies, across the country. To pay your bills, all you need to do is complete a simple one-time
registration for each biller. You can also set up standing instructions online to pay your recurring bills,
automatically. Generally, the bank does not charge customers for online bill payment.3

2. Fund transfer

You can transfer any amount from one account to another of the same or any another bank.
Customers can send money anywhere in India. Once you login to your account, you need to mention
the payees's account number, his bank and the branch. The transfer will take place in a day or so,
whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill
payment service and fund transfer facility have been their most popular online services.

3. Credit card customers

With Internet banking, customers can not only pay their credit card bills online but also get a loan on
their cards. If you lose your credit card, you can report lost card online.

3
http://www.worldjute.com/ebank.html
 4. Railway pass

This is something that would interest all the aam janta. Indian Railways has tied up with ICICI bank and
you can now make your railway pass for local trains online. The pass will be delivered to you at your
doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune.

5. Investing through Internet banking

You can now open an FD online through funds transfer. Now investors with interlinked demit account
and bank account can easily trade in the stock market and the amount will be automatically debited from
their respective bank accounts and the shares will be credited in their demat account. Moreover, some
banks even give you the facility to purchase mutual funds directly from the online banking system.
Nowadays, most leading banks offer both online banking and demat account. However if you have
your demat account with independent share brokers, then you need to sign a special form, which will
link your two accounts.

6. Recharging your prepaid phone

Now just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your
operator's name, entering your mobile number and the amount for recharge, your phone is again back in
action within few minutes.

7. Shopping

With a range of all kind of products, you can shop online and the payment is also made conveniently
through your account. You can also buy railway and air tickets through Internet banking.

Advantages

The advantages of internet banking are listed below.

 Eliminates the use of paper and replaces it with computer screens.

 No need to stand in line at the bank, because all you have to do is log on to the internet
access your account.
 It is safe, hassle free, saves hours of time a month.
 Greater reach to customers.
 Quicker time to market.
 Ability to introduce new products and services quickly and successfully.
 Ability to understand its customer needs.
 Customers are given access to information easily across any location.
 Greater customer loyalty.
 It is convenient.
 There are no geographical barriers.
 Getting quarterly statements from the bank, transferring funds to outstation.
 Services can be offered at a miniscule cost.
 Difficulties

These are all the following difficulties in Internet Banking in India

The RBI does not still allow inter-bank funds transfer through the net since the Cyber laws are
still not in place. Once allowed, this could pave the way for smooth cash management.

 Security also continues to remain a major issues especially in the case of corporate, as bulk
transactions are done in a day.
 Bankers are aware of the fact reliable transaction technology as well as management of the
security perceptions of customers are the keys to success.
 The infrastructural costs of providing such services are quite high.
 Limited criteria in online trading.
 Delay in fund transfer.
 When server downs the whole process handicapped.
 Technical problems occur sometimes which affect customers badly.
 Late processing also sometimes in some services create a hurdle causing delay.
 Late security level in the service to cope with hacking problem.

Legal Issues

 Considering the legal position prevalent, there is an obligation on the part of banks not
only to establish the identity but also to make enquiries about integrity and reputation of
the prospective customer. Therefore, even though request for opening account can be
accepted over Internet, accounts should be opened only after proper introduction and
physical verification of the identity of the customer.4

 From a legal perspective, security procedure adopted by banks for authenticating users
needs to be recognized by law as a substitute for signature. In India, the Information
Technology Act, 2000, in Section 3(2) provides for a particular technology (viz., the
asymmetric crypto system and hash function) as a means of authenticating electronic
record. Any other method used by banks for authentication should be recognized as a
source of legal risk.

 Under the present regime there is an obligation on banks to maintain secrecy and
confidentiality of customers' accounts. In the Internet banking scenario, the risk of
banks not meeting the above obligation is high on account of several factors. Despite
all reasonable precautions, banks may be exposed to enhanced risk of liability to
customers on account of breach of secrecy, denial of service etc., because of hacking/
other technological failures. The banks should, therefore, institute adequate risk control
measures to manage such risks.

4
Internet Banking in India - Guidelines, www.banknetindia.com/banking/ibguide3.htm, See Paras 8.4.1, 8.4.2 of
the Report.
  In Internet banking scenario there is very little scope for the banks to act on stop-
payment instructions from the customers. Hence, banks should clearly notify to the
customers the timeframe and the circumstances in which any stop-payment instructions
could be accepted. The Consumer Protection Act, 1986 defines the rights of consumers
in India and is applicable to banking services as well. Currently, the rights and liabilities
of customers availing of Internet banking services are being determined by bilateral
agreements between the banks and customers. Considering the banking practice and
rights enjoyed by customers in traditional banking, banks' liability to the customers on
account of unauthorized transfer through hacking, denial of service on account of
technological failure etc. needs to be assessed and banks providing Internet banking
should insure themselves against such risks.5

Suggestions

The following are the suggestions for the further improvement of Internet Banking in India
.

1. Bank should provide the services in different languages.

2. All the complaints felt by the customers should be considered with seriousness and solution
based approach to keep them satisfied in long run,
3. The bank should extend their tie-up contracts with other various institutions whether financial
or non-financial for convenience of its customers.
4. Bank should extend the technology which is used in internet banking in order to remove the
difficulties.

Conclusion

Internet banking has become a necessary survival weapon and is fundamentally changing the
banking industry worldwide. Today, the click of the mouse offers customers banking services at
a much lower cost and also empowers them with unprecedented freedom in choosing vendors
for their financial service needs. The rise of Internet banking is redefining business relationship
with the customers. The International scope of Internet banking provides new growth
perspectives and Internet business is a catalyst for new technologies and new business
processes. The reach of Internet banking has rapidly increased due to the Telecommunication
Infrastructure development in India. From the perspective of banking products and services
being offered through Internet, Internet banking is nothing more than traditional banking
services delivered through an electronic communication backbone, viz, Internet. But, in the
process it has thrown open issues which have ramifications beyond what a new delivery
channel would normally envisage and, hence, has compelled regulators world over to take note
of this emerging channel. Some of the distinctive features of e-banking are:

1. It removes the traditional geographical barriers as it could reach out to customers of different
countries / legal jurisdiction. This has raised the question of jurisdiction of law / supervisory
system to which such transactions should be subjected,

2. It has added a new dimension to different kinds of risks traditionally associated with banking,
heightening some of them and throwing new risk control challenges,

5
CURRENT ISSUES IN BANKING SUPERVISION, www.resbank.co.za/bsup/ann20/hap2.htm.
3. Security of banking transactions, validity of electronic contract, customers' privacy, etc.,
which have all along been concerns of both bankers and supervisors have assumed different
dimensions given that Internet is a public domain, not subject to control by any single authority
or group of users,

4. It poses a strategic risk of loss of business to those banks who do not respond in time, to this
new technology, being the efficient and cost effective delivery mechanism of banking services,

5. A new form of competition has emerged both from the existing players and new players of
the market who are not strictly banks.

BIBLIOGRAPHY

Primary Resources

Tannan, M.L , Banking Law and Practice

J.H. Holden, The Law and Practice of Banking, Universal Law Publishing
PHI Learning Private Limited
Banking Commission : Reports, Reserve Bank of India : Bulletins, Reserve Bank of India:
Annual Reports.

Secondary Resources
 http://www.mondaq.com/india/x/20687/Internet+Banking+in+India
 http://www.worldjute.com/ebank.html
 Internet Banking in India - Guidelines, www.banknetindia.com/banking/ibguide3.htm,
See Paras 8.4.1, 8.4.2 of the Report.