Legal Issues involved in Net Banking in India

-Pradyumna Singh Rathore

There has been rapid and enormous growth in the banking sector over the last decade and
banks in India has been developing simultaneously by adopting new technological inventions
and hence providing services to their customers much more promptly and effectively. Internet
has been one of such technology that has been widely used by the banks to provide for the
demand and supply of services, cost effectively. Just like the coin has two faces everything
has pros and cons similarly e-banking though no doubt have incomparable features but it also
has cons and one of those being the risks associated with it. Some of the risks are as follows:

Operational risk
Security risk
System architecture & design risk
Reputational risk
Legal risks
Money laundering risk
Strategic risk 1

Internet banking is nothing but the extended version of the traditional banking system which
uses internet as a medium for providing services to its customers. Hence, conceptually,
various provisions of law, which are applicable to traditional banking activities, are also
applicable to E-banking.2

Government of India has enacted, The Information Technology Act, 2000, in order to provide
legal recognition for transactions carried out by means of electronic data interchange and
other means of electronic communication. In the course of providing E-banking services, the
banks in India are facing new challenges relating to online opening of accounts,
authentication, privacy of customers accounts, non-repudiation, liability standards and
consumer protection, etc., each of which has been examined in the context of existing legal
framework.

1See prof. Virender Singh Solanki, RISKS IN E-BANKING AND THEIR MANAGEMENT,
International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 9,
September 2012.

2 See Dasgupta, P. , Future of E banking in India, 2002, available at www.projectshub.com

The present legal scenario does not set out the parameters as to what extent an individual can
be bound with respect of an electronic instruction purported to have been issued by him.
Generally, authentication is achieved by what is known as security procedure. Methods and
devices like the personal identification numbers (PIN), code numbers, telephone-PIN
numbers, relationship numbers, passwords, account numbers and encryption are evolved to
establish authenticity of an instruction. From a legal perspective, the security procedure
requires to be recognized by law as a substitute for signature.3

The existing regime also imposes a legal obligation on the bankers to maintain secrecy and
confidentiality about the customers account. The law at present requires the banker to take
scrupulous care not to disclose the state of his customer's account except on reasonable and
proper occasions.

Earlier there was no specific enactment in India which protects privacy of customers. The
Information Technology Act, 2000, in Section 72 has provided for penalty for breach of
privacy and confidentiality. Further, Section 79 of the Act has also provided for exclusion of
liability of a network service provider for data travelling through their network subject to
certain conditions.4 Thus, the liability of banks for breach of privacy when data is travelling
through network is not clear. This aspect needs detailed legal examination. The issue of
ownership of transactional data stored in banks computer systems also needs further
examination. Cross border transactions carried through Internet also posses the issue of
jurisdiction and conflict of laws of different nations.

The Consumer Protection Act, 1986 defines the rights of consumers in India and is applicable
to banking services as well. The rights and liabilities of customers availing of Internet
banking services are being determined by bilateral agreements between the banks and
customers.5

Conclusion

3See, Journal of Internet Banking and Commerce - www.Arraydev.com/commerce/jibc

4See, Prithviraj Dasgupta and Kasturi Sengupta, E-Commerce in the Indian Insurance Industry;
Electronic Commerce Research; Vol.2, 2002; pp.43-6.

5See, Farooq Ahmed, Electronic Commerce : An Indian perspective, International Journal of Law and
Information Technology; Vol.9, No.2, 2001;pp.133-170.
With the rapid growth in the field of technology, internet and e-banking there is a need that
the government and concerned authorities should constantly review the laws governing e-
banking and also recommending appropriate measures to go hand in hand with the constantly
changing field of internet and e-banking and to keep the statutes updated with the changes in
the field.