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a). History
b). Objectives
c). Coverage
d). Definitions
e). Procedure for Participation
(i) Admission
(ii) Suspension
(iii) Withdrawal from Participation
(iv) Cancellation of Letter of Admission
f). Process Flow
g). Inter-Bank Settlement
h). Rights and Obligations
i). Service Charges
j). Dispute Resolution Mechanism
k). Amendment to Procedural Guidelines

Electronic funds transfer (EFT) is the electronic exchange, transfer of money from
one account to another, either within a single financial institution or across multiple
institutions, through computer-based systems.
The term covers a number of different concepts:

Wire transfer via an international banking network.

a payment
card such
a credit or debit card.
Direct deposit payment initiated by the payer.
Direct debit payments, sometimes called electronic checks, for which a
business debits the consumer's bank accounts for payment for goods or
Electronic bill payment in online banking, which may be delivered by EFT or
paper check.
Transactions involving stored value of electronic money, possibly in a private
Electronic Benefit Transfer.

"Any transfer of funds that is initiated by electronic means, such as an electronic
terminal, telephone, computer, ATM or
"Electronic banking, also known as EFT, uses computer and electronic technology as
a substitute for cheques and other paper transactions."1
It is "the use of telecommunications networks to transfer funds from one financial
institution, as a bank, to another, or to withdraw funds from one's own account to
deposit in a creditor's."2
The use of EFT results in the instantaneous movement of money. The additional time
that the funds are available to earn income can more than offset the fees charged by
institutions for this service. Its also called wire transfer.3
EFT is "a standard mechanism for electronically transmitting funds between two
parties."4 An example of widely used EFT application that it cites is `Direct Deposit',
in which pay is deposited straight into an employee's bank account.
"Transactions are processed by the bank through the Automated Clearing House
(ACH) network, the secure transfer system that connects all US financial institutions.
3, from `Wall Street Words'.
4 Glossary of Statistical Terms on

For payments, funds are transferred electronically from one bank account to the
billing company's bank, usually less than a day after the scheduled payment date,"
explains the Web site.
The Electronic Clearing System (ECS) is the Indian version of the ACH in other
countries for catering to bulk payments.5
The Vision document declares as its mission statement6,
The establishment of safe, secure, sound and efficient payment and settlement
systems for the country. And its glossary explains ECS (Credit) as credit clearing that
ensures "multiple repetitive credits to the accounts of constituents of banks situated at
various branches of banks on the basis of a single debit to the account of a corporate
customer called the `user'," as for instance in payroll that `Direct Deposit' speaks
RBI introduced the ECS credit scheme to reduce the pressures on the cheque clearing
and settlement process, and to improve customer service, especially for high volume,
low value clearing. "An ECS debit scheme was also brought to market to facilitate
payment of charges to utility services."
A common example is of paying one's telephone bills through ECS debit. These are
also called preauthorized transfers. ECS is the ACH system in India, while EFT is
the system for single/individual payments. EFT is safe, secure, efficient, and less
expensive than paper cheque payments and collections.
In 1995, the Reserve Bank had set up the Committee for Proposing Legislation on
Electronic Funds Transfer and other Electronic Payments (Chairperson : Smt.
K.S.Shere). The Shere Committee had recommended a set of EFT Regulations by the
Reserve Bank under the Reserve Bank of India Act,1934 and amendment to the
Bankers Books Evidence Act,1881 as short term measures and promotion of a few
Acts like the
Electronic Funds Transfer Act, the Computer Misuse and Data Protection Act etc. as
long term measures. The Reserve Bank has already initiated steps for framing of EFT
Regulations. The Government of India have also initiated steps for promoting
Information and Technology Act, 1999 and consequential amendments to the
Reserve Bank of India Act, 1934, the Bankers Books Evidence Act, 1881 etc.

5 Payment Systems in India Vision 2005-08' dated May 3, 2005, available
6 www.

In India there is no separate law regarding electronic fund transfers till date. A few
areas of EFT are governed under the Payment and Settlement Systems Act 2007 8. As
a first step, the RBI has recently set up a Board for Payment and Settlement Systems.
There is the Model Law on International Credit Transfers (1992) from UNCITRAL
(the United Nations Commission on International Trade Law). The Committee on
Payment and Settlement Systems of the G-10 countries (CPSS) set up under the
auspices of the Bank for International Settlements (BIS) has formulated best practices
in the form of Core Principles for Systemically Important Payment Systems (SIPS)9.
Till a new law is in place to govern EFT, the good old Negotiable Instruments Act,
1881, will hold the fort. In India EFT is in application through the National Electronic
Fund Transfer (NEFT)
The Payment and Settlement Systems Act 2007 regulates and oversees the various
payments and settlement systems in India. In an era of online transactions, this new
law is likely to become a hotbed of litigation in the near future. Law Relating to
Electronic Transfer of Money is a commentary on the Payment and Settlement Act
200710. It is a handy and comprehensive reference on all related Acts, Regulations,
Notifications, Circulars and Guidelines. The Act makes the dishonour of online
transactions punishable in the same manner as the dishonour of cheques under s.
Admission of electronic files as evidence and preservation of records:
The Shere Committee had discussed the issues of admitting electronic files as
evidence and of preserving electronic records and recommended the need to amend
the Bankers' Books Evidence Act, 1881 on the lines of the Customs and Central
Excise Laws (Amendment) Act, 1988 and Central Excise and Salt Act, 1944 for the
purpose. The Government of India is processing the draft Bill amending the Bankers
Books Evidence Act, 1881. This is a welcome development and would meet the legal
requirement of acceptance of contracts, documents etc. in electronic form as evidence.
The Committee considered certain provisions of the proposed Electronic Commerce
Bill for admitting electronic records / signatures as evidence. Clauses 9, 10, 11, 12
and 14 of this proposed Bill, which are relevant in this connection, are given
in Annexure 16. It is worth mentioning that while clauses 9, 10 and 11 of this Bill are
based on the UNCITRAL Model Law, clauses 12 and 14 are based on Singapore
Electronic Transactions Act. As and when the Electronic Commerce Bill is passed,
these provisions will be made applicable, ipso facto, to electronic funds transfer
transactions as well.

8 sec 25, sec 23 etc

9Model/Illustrative Payment and Settlement Systems Bill' in a report of the Committee on Payment
Systems dated November 28, 2002, last seen: 23rd march 2013 at 3:13 pm
10 Act no 51 of 2007
11 Negotiable Instruments Act, 1881

Funds Transfer through EFT Systems from Tax Compliance Angle
The Shere Committee had recommended that the Central Board of Direct Taxes
(CBDT) may be requested to take up the question of clarifying and, if required,
amending the relative provisions of the Direct Tax Laws like Section 40A of the
Income-Tax Act, 1961. The Committee however felt that, for according the funds
transfer under the EFT system the same status of payment as one made by an A/c
payee cheque, suitable technology may have to be developed for treating such
transfers as A/c payee transfers. A mere recognition to that effect by the CBDT may
not be adequate to treat such transfer as A/c payee cheques. Legal provisions need to
be made if such recognition has to be given. The first test would arise when paper
instruments like cheques are used along with the use of EFT system. So long as both
the systems are in existence at the same time, it would require either amendments to
the Negotiable Instruments Act or a separate legislation to deal with the matter.
1. History
Mr Bimal Jalan, former governor of RBI for the first time proposed to commence
NEFT using the facilities available under the Structured Financial Messaging Solution
(SFMS) over the Indian Financial Network (INFINET) in 2002. The Annual Policy
Statement of April 2002 emphasized the usage of EFT on a large scale to bring about
greater efficiency in the movement of funds, and reduction in risks in funds transfer.
Mr Y.V. Reddy, former RBI governor said, in his Mid-term Review of Annual Policy
for 2005-06 that NEFT would be implemented in phases. "By end-December 2005,
NEFT would be operationalized in 34 banks. By end-June 2006, the remaining banks
are expected to be part of the system."
In the very same year the Reserve Bank of India (RBI) commenced the live operation
of the National Electronic Funds Transfer (NEFT) with eight banks are on the NEFT
network and only one settlement a day, the system assures instant fund transfer for
retail customers, instead of the usual week for inter-city transfers, and half that time
for intra-city ones.
2. Objectives12
(1) To establish an Electronic Funds Transfer System to facilitate an efficient, secure,
economical, reliable and expeditious system of funds transfer and clearing in the
banking sector throughout India, and
(2) To relieve the stress on the existing paper based funds transfer and clearing
3. Coverage
12 National Electronic Funds Transfer System Procedural Guidelines, November
2005, revised on September 2008 and April 2011, last seen: 23 march 2013 at 3:39 pm

This system applies to participating banks/ and branches in the system as notified by
Reserve Bank of India from time to time on its official Web site13.
4. Definitions
The guidelines define terms like NEFT Clearing Centre. NEFT SFMS message,
NEFT Service Centre, NEFT System, Sending/Originating Bank, SFMS Message etc.
5. Procedure for Participation
i) Admission: To be eligible to apply for admission as a participating bank,
(a) Shall be a bank. Regional Rural Banks (RRBs) can also participate through
their sponsor bank in accordance with the guidelines issued by RBI.
(b) Shall be a member of the Real Time Gross Settlement (RTGS) System.
(c) Shall have installed SFMS.
(d) Shall meet the other prescribed eligibility criteria / conditions which are
notified by RBI from time to time (eligibility criteria for the present is
indicated in Annexure IV).
Provided that, all or any of the above conditions may be relaxed or dispensed with, if
so decided by the Reserve Bank of India.
List of participant banks and bank-branches will be displayed on website of Reserve
Bank of India.14
Every application shall be accompanied by an undertaking in the specified form to
abide by the Procedural Guidelines in the event of admission.
Letter of Admission as specified in Annexure II (Form : NEFT-IB) to every bank
admitted to the NEFT System will be issued by Reserve Bank of India.
(ii) Suspension :
(a) If a participating bank has defaulted in meeting its settlement obligations or
paying any charges or fees or complying with any procedural guideline
provisions or for any reasons specified at paragraph 5(iv), the Letter of
Admission issued to it is liable to be kept under suspension for such period as
may be specified in the order of suspension.
(b) Every order of suspension shall be notified immediately to all the
participating banks and institutions including the bank or institution against
which the order of suspension is passed.
(c) An order of suspension may be reviewed and may be revoked at any time
by the Reserve Bank of India upon representation received from the concerned
bank or on its own. Every revocation shall be notified immediately to all

participating banks.
(d) A participating bank shall not, while any order of suspension is in force
against it, be entitled to send or receive any NEFT message or otherwise to
affect any funds transfer in the NEFT System.
(e) Provided that a suspension shall not affect the obligations of the suspended
bank or institution, whether incurred before or after the suspension.
(iii) Withdrawal from Participation15:
(a) Any participating bank or institution may, by giving a notice of one month
to the Regional Director, Reserve Bank of India, Mumbai Regional Office,
withdraw from participating in NEFT System.
(b) No notice under these guidelines shall be effective unless it is given in
writing and before the expiry of one month from the date of receipt of notice
by the Regional Director, Reserve Bank of India, Mumbai Regional Office,
Shahid Bhagat Singh Marg, Fort, Mumbai 400 001.
(c) Notwithstanding its withdrawal, a bank shall discharge all its payment
obligations arising out of fund transfers attributable to it, whether effected
before or after the withdrawal became effective.
(d) The withdrawal of any participating bank shall be notified to all the
participating banks by the Regional Director, Reserve Bank of India, Mumbai
Regional Office, Shahid Bhagat Singh Marg, Fort, Mumbai - 400 001.
(iv) Cancellation of Letter of Admission:
Letter of admission issued to a bank may be cancelled by the Reserve Bank on it
being satisfied that such bank has
(a) Defaulted in complying with any Regulations / Procedural Guidelines /
admission terms and conditions / instructions issued from time to time.
(b) Been placed under an order of moratorium or an order prohibiting
acceptance of fresh deposits or an order of winding up or in respect of which a
provisional liquidator has been appointed.
(c) Stopped or suspended payment of its debts.
(d) Failed to get the order of suspension passed against it under Regulation
8(e) of the Uniform Regulations and Rules for Bankers Clearing Houses
(URRBCH) revoked within a period of three months from the date of order of
(e) Has conducted its transactions in the NEFT System in a manner prejudicial
/ detrimental to the interest, integrity or efficiency of the System.
No order of cancellation shall be passed without first giving an opportunity of hearing
15Sl. 5 (c) of National Electronic Funds Transfer (NEFT) System Procedural Guidelines 2011

to the bank concerned.
Every order of cancellation shall be notified to the respective bank and also to all
other participating banks in the NEFT System.
Notwithstanding the order of cancellation of Letter of Admission passed against it,
such bank shall discharge all its payment obligations arising out of the funds transfers
effected in the NEFT System.

6. Process Flow16
The parties to a funds transfer under this NEFT System are the sending bank, the
sending Service Centre, the NEFT Clearing Centre, the receiving Service Centre and
the beneficiary branch.
The following steps are involved:
a) Request for NEFT by Bank Customer / Any Person
b) Data Entry at the Sending Bank Branch
c) Processing/Data Uploading and Sending to NEFT Service Centre
d) Transmission / Submission of NEFT Message to the NEFT Clearing Centre
e) Processing and Transmission of NEFT Message to the Beneficiary Banks
f) Data Validation at the Receiving NEFT Service Centre
g) Payment to Beneficiary
h) Revocation of Payment Instruction
i) Acknowledgement / Positive Confirmation by the Beneficiary Bank and
Return in Case of Non-Credit
j) Sender to be advised in Case of Returns
k) Beneficiary to be Advised of the Receipt of Funds
l) Holidays

7. Inter-Bank Settlement17

16 Sl. 6 of National Electronic Funds Transfer (NEFT) System Procedural Guidelines 2011
17 Sl. 7 of National Electronic Funds Transfer (NEFT) System Procedural Guidelines 2011

(i) Inter-bank Funds Settlement at Reserve Bank: Every participating bank and
admitted institution shall open and maintain in the NEFT Clearing Centre, a
settlement account for settlement of payment obligations arising under the funds
transfer executed under the NEFT system.
(ii) Finality of Settlement : The settlement so arrived by through multilateral netting
shall be final and irrevocable, in terms of section 23 of the Payment and Settlement
Systems Act, 2007 as soon as the same is determined in terms of the procedures
notified by RBI.
(iii) Settlement and Default Handling Procedure: Aspects relating to finality of
settlement and default handling in the event of failure-to-settle situations will be in
accordance with the Directive on Settlement and Default Handling Procedures issued
by RBI and as duly amended from time to time.
8. Rights and Obligations18
Every sender/ originator, sending bank, receiving bank, clearing center and the
beneficiary bank will have certain rights and obligations.

General Rights and Obligations of Sender / Originator, Participating Banks or

Rights and Obligations of the Sender / Originator
Rights and Obligations of Sending Bank
Obligations of the Sending NEFT Service Centre
Obligations of NEFT Clearing Centre
Obligations of the Receiving NEFT Service Centre
Rights and Obligation of Beneficiary Bank

9. Service Charges
The service charges to be levied by the originating banks would be in terms of the
instructions issued from time to time under the framework of charges to be levied by
the banks for offering various electronic products
There are no processing charges levied by the NEFT Clearing Centre up to March 31,
2011. The same would be reviewed periodically. The RBI may, if it so desires in
future, decide to levy any other charge / fee as also the quantum thereof. Beneficiary
Banks would not claim service charge for passing on the credit t the beneficiaries.
10. Dispute Resolution Mechanism
The mechanism for resolution of disputes will be in accordance with the Directive on
Dispute Resolution Mechanism issued by RBI and as duly amended from time to

11. Amendment to Procedural Guidelines

18 Sl. 8 of National Electronic Funds Transfer (NEFT) System Procedural Guidelines 2011

The Procedural Guidelines can be amended only by RBI. RBI may also, by issuance
of a circular, amend the procedure19.

NEFT offers many advantages over the other modes of funds transfer:

The remitter need not send the physical cheque or Demand Draft to the

The beneficiary need not visit his / her bank for depositing the paper

The beneficiary need not be apprehensive of loss / theft of physical

instruments or the likelihood of fraudulent encashment thereof.

Cost effective.

Credit confirmation of the remittances sent by SMS or email.

Remitter can initiate the remittances from his home / place of work using the
internet banking also.

Near real time transfer of the funds to the beneficiary account in a secure


Lack of legal clarity

Lack of an apposite provision in law for regulation and supervision of these


Lack of a monitoring mechanism leading to apprehension of participants and


Doubts on the safety and security of the payment systems



Reserve Bank of India vides its circular 20 have highlighted that section 25 of the
Payment and Settlement Systems Act, 2007 accords the same rights and remedies to
the payee (beneficiary) against dishonour of electronic funds transfer instructions for
insufficiency of funds in the account of the payer (remitter), as are available to the
payee under section 138 of the Negotiable Instruments Act, 1881.
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
Hence it is very clear that the system of electronic fund transfer (EFT) has proved to
be beneficial in the Indian baking scenario in reducing the paperwork and increasing
the efficiency and the speed of banking system in the country.
The scheme would prove to be even more beneficial when there is a proper statute to
govern the system like the Electronic Fund Transfers Act 21 of the United States. There
is an urgent need to enact a new law on the e transfers independent of the Negotiable
Instruments Act and the Public Settlement Systems Act, with respect to the dynamic
Indian society to make the scheme even more effective and successful.
A proper mechanism of guidance and dispute settlement are also suggested.
Legal issues relating to electronic transaction processing at banks are very many and
the need to address them by amending some of the existing Acts and by promoting
legislation in a few hitherto unexpected areas has assumed critical urgency. Necessary
legislative support is essential to protect the interests as much of the customers as of
the banks / branches in several areas relating to electronic banking and payment
This is specially required to establish the credibility of ECS and EFT schemes based
on the electronic message transfer. Since the Reserve Bank is embarking on large
electronic schemes such as the nation wide RTGS, it is time that efforts are made to
bring about necessary legislative framework that synchronises and synthesises with
the initiatives taken by the Government of India, Department of Electronics for
promotion of the Information Technology Bill, 1999 and / or the Electronic
Commerce Bill, 1999.

20 Circular no. DOC/2011-12/191 DPSS. O.PD.No.497/02.12.004/2011-12 issued on 21 September

2011, last seen: 23rd march 2013 at 4: 47 pm

21 Codified to 15 U.S.C. 1601 note


1. The Reserve Bank of India Act, 1934 needs to be amended with a view to
providing RBI with the desired regulatory and supervisory powers on payment and
settlement systems.
Simultaneously there is also a need to formulate a separate legislation on electronic
fund transfer system. This will inter alia facilitate multiple payment system by banks
and financial institutions.
2. The RBI and IBA should pursue with the Department of Telecommunications
(DoT) / other competent Authority to permit encryption of data files / messages
transmitted through communication channels.
This would facilitate easier access to remotely located branches to the INFINET
network. The standardized financial messages would also get necessarily encrypted
irrespective of the type of network used - private or public.
3. As recommended by the Committee for Proposing Legislation on Electronic Funds
Transfer and other Electronic Payments, amendments to the Bankers Books Evidence
Act, 1881 and other relevant Acts would need to be carried out.
This would facilitate recognising computer print-outs and records stored on
electronic media used in banking transactions as primary evidence within the
definition of the Bankers Books Evidence Act, 1881.
4. The provisions made in the proposed Electronic Commerce Bill, 1999 and the
Information and Technology Bill, 1999 seek to clarify the legal position on several
issues in electronic transactions which would equally apply to banking transactions
carried out on computer and communications networks.
To firm up the responses of banking industry to the initiatives taken by the
Government of India and for bringing about a new legislation on electronic funds
transfer as also to examine legal issues that arise in the course of development of
electronic banking, a Standing Committee to examine all legal issues on Electronic
Banking with members drawn from the Legal Departments of the RBI, IBA, a few
banks and Department of Electronics may be set up by the Reserve Bank.


5. CBDT would need to take up the question of amending the relative provisions of
the Direct Tax Laws like Section 40 A of the Income Tax Act, 1961 to accord
electronic funds transfer the status of crossed cheques / drafts for the purpose of
payment of income tax and other taxes.
Simultaneously, it should be ensured that the account payee transactions are put
through the electronic fund messages to the stipulated account in the same manner as
account payee crossed cheques are treated.
6. To facilitate the introduction of cheque truncation in India, the definition
of presentment in the Negotiable Instruments Act, 1881 would have to be amended to
permit electronic presentment of data or image of the cheque.
The Reserve Bank may be empowered to frame Regulations on Cheque Truncation by
suitable amendment to the Reserve Bank of India Act, 1934. Appropriate changes may
accordingly be incorporated in the Clearing House Regulations and Rules as well.
7. As already recommended by the Shere Committee, there should be a clear
distinction between the role of a service provider and that of a regulator and
Since low value and high volume payments require a good deal of servicing of the
participating institutions, it is recommended that such payment and settlement
systems may be managed by a group of banks with only the net clearing positions
being settled at the Reserve Bank or the settlement bank as notified by the RBI.
The Reserve Bank may restrict its electronic funds transfer services only for large
value transactions and essential Government securities transactions.
Suitable amendment may be carried out to the Reserve Bank of India Act, 1934
empowering the RBI to frame regulations on operating its own electronic funds
transfer services as an extension of the Remittance Facilities Scheme, 1940 and to
implement model regulations for electronic funds transfer, payment and settlement
systems to be operated by group of banks.
8. The proposed Standing Committee on legal issues on Electronic Banking may,
among others, consider the need for appropriate regulation/ legislation on netting of
inter-bank payment obligations arising out of the EFT systems which would operate
on deferred/ discrete/ netting basis.
The need for a model Posting Rules which would determine the time of posting of the
net position and time gap after which withdrawal would be permitted by the bank
acting as the Settlement Bank, may form part of the netting regulations/ legislation.
The Standing Committee may examine the need for incorporating for model risk
management practices as part of the netting regulation / legislation.
9. The issue of confidentiality and sharing of data among the users need to be
examined in view of the banks secrecy obligations. The Standing Committee may also

examine the legal aspects which would enable sharing of confidential data between
the user agencies.


Law Relating To Electronic Transfer of Money- M A Rashid, 2nd
edition, 2010, , Lexis Nexis Publications

National Electronic Funds Transfer System Procedural Guidelines,
November 2005, revised on September 2008 and April 2011.
Model/Illustrative Payment and Settlement Systems Bill' in a report
of the Committee on Payment Systems dated November 28, 2002.
The Hindu Business line, November 23, 2005


Payment and Settlement Systems Act 2007
Negotiable Instruments Act, 1881
Reserve Bank of India Act, 1934
Bankers Books Evidence Act, 1881
Information and Technology Act, 1999
Singapore Electronic Transactions Act