E-Cheque System in India: A Distant Reality
With amendments in the Sections 6 and 1(4), coupled with the introduction of 81 A to the Negotiable Instruments Act, 1881, ECT is now legalized. After initial implementation in the national capital region, it will spread gradually across the country, though the stipulated deadline for the phased commencement is December 31, 2006. In 2002, ‘e’ is for an e-cheque. An electronic cheque. A cheque that never expires. A cheque that never bounces whether because of insufficient balance in the account or a faulty signature. A cheque the creditor doesn’t have to present physically at his bank. A cheque that enables outstation payments to be credited to the payee’s account within 2-3 days flat. A cheque that transfers money at half the cost of a demand draft!
E-cheques are already operational in the US, Australia has put them on trial since November 2001 and now they are here in India.
Banking sector is considered the heart of an economy; integration of the banking and the information technology industry has benefited the consumers in many aspects with respect to time, cost and operational efficiency. Cheque is the most widely accepted Negotiable Instrument to settle transactions in the world. Paper cheques provide consumers and businesses critical alternative payments mechanism. Today billions of cheques are written and processed each year, and consumers and businesses remain confident and satisfied with writing cheques. However, cheque processing is experiencing a radical change as financial institutions and their customers now have new, more efficient ways to process and clear cheques. Financial institutions need to develop and implement a cheque image clearing strategy to remain competitive in the future.
Negotiable Instruments consist of three types of instruments namely, the Promissory Note, The Bill of Exchange and the Cheques. RBI‘s jurisdiction is mainly limited to the "Cheques" since it is an instrument drawn payable on a Bank by a Customer. By definition, (Sec 6 of NI Act), a "Cheques" is a bill of exchange drawn on a specified Banker and expressed to be payable not otherwise on demand. A Bill of Exchange (Sec 5) is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to and to the order of a certain person or to the bearer of the instrument.
If we look at the provisions of the ITA-2000, we observe that the requirement of Writing and Signing are easily satisfied by the recognition of electronic documents and digital signatures. The other aspects of the above definition are that the drawee should be a Banker and the sum payable and the person to whom it is payable should be Certain and the Order to pay should be unconditional. These are also possible to be satisfied by the existing provisions of the Act. But for the exclusion of the Negotiable Instruments by the ITA-2000, it appears that the system of virtual cheques would have become feasible now. However, will a virtual Cheque be ever equivalent to a Real Cheque? This, depends on the many other hidden features that the Cheque as we know today and the family of Negotiable Instruments as we know today possess.
Important features of the Cheque are:
2.System of Crossing and its implications
3.Creation of a Holder in Due Course
A Cheque as any other Negotiable Instrument is transferable by Delivery in case it is drawn payable to a Bearer and by Endorsement and Delivery when made payable to order. The word Bearer has been used in the NI Act as a person who is in the physical possession of the written instrument. This aspect of Delivery cannot be constructive or implied in case of Negotiable instruments. Hence it can be fulfilled only in respect of Written Negotiable Instruments. If the Virtual instruments are to be acceptable, perhaps these concepts of Delivery and Bearer as applicable to them have to be redefined.
2. System of crossing:
The idea of crossing of cheques has always been recognized through the method of physically writing on the paper cheques. But after the introduction of electronic cheques, the method of physically crossing the cheques has not been suitable amended so that if a particular cheque has to be crossed or is required to be sent to a particular account, there are no complications. Nowhere has it been mentioned after the amendment that the system of crossing shall also be electronically completed. Crossing by definition is an act of Writing. Unless this is redefined, it cannot be applied by extension.
3. Holder in Due Course:
This aspect of negotiable instruments actually rests totally upon the fact that there has to be a physical existence of the cheque. Unless and until such existence is not there, it shall not be possible to have a Holder in Due Course for a cheque or any other negotiable instrument. There has not been an amendment which could give a full proof recognition to a holder in due course of an electronic cheque. The very essence of a Negotiable Instrument is its ability to create a Holder in Due Course. Whatever attempt has been made to redefine the law and introduce Virtual Negotiable Instruments it will have to accommodate this feature. Without this, the Virtual Cheques can only be another type of a Quasi Negotiable Instrument
4: Rights and Liabilities of Bankers:
The extent of liability of the Collecting and the Paying Banker has been very clearly laid down under the Banking law. It cannot be extended to the electronic cheques, simply by introducing the concept of e-cheques without providing for a suitable amendment, which would clarify as to rights and liabilities of the banks. It should be made clear as to when will the liability of the paying banker arise in case of a fraud with respect to electronic cheques, and what remedy does it have against the customer. It should also be mentioned regarding the Collecting Banker
Problems with the traditional payment systems:
1. Lack of Convenience:
Traditional payment systems require the consumer to either send paper cheques by snail-mail or require him/her to physically come over and sign papers before performing a transaction. This may lead to annoying circumstances sometimes.
2. Lack of Security:
This is because the consumer has to send all confidential data on a paper, which is not encrypted, that too by post where it may be read by anyone.
3. Lack of Coverage:
When we talk in terms of current businesses, they span many countries or states. These business houses need faster transactions everywhere. This is not possible without the bank having branch near all of the companies’ offices. This statement is self-explanatory.
4. Lack of Eligibility:
Not all potential buyers may have a bank account.
AMENDMENTS TO THE NEGOTIABLE INSTRUMENTS ACT, 1881. [17th December, 2002.]
1. Substitution of new section for Section 6.-
For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter in this Chapter referred to as the principal Act), the following section shall be substituted, namely:-
"Cheque". - A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I.-For the purposes of this section, the expressions –
(a) "a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) "a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II.- For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.'
2. Amendment of Section 81-
Section 81 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:-
"(2) Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque.
(3) A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment."
Need For Electronic Tokens:
Most E-Commerce applications are based on the Credit Card. Internet users will log on to different sites giving their credit card nos. along with some additional information such as Birth Date, a Pre defined Password / Email ID. But these features do not provide the facility of Cash. Accepted, that even villages today are going for credit cards, but it cannot replace the flexibility of Cash. The liquidity aspects of cash cannot be replaced by plastic money. In USA, there is 300 billion Dollars worth of notes and currency in circulation. Deposits by cheque are growing at the rate of 6 % and that by cash is growing at the rate of 8 %. This alarming statistic clearly indicates that cash transactions are not out. Infact a credible alternative to cash has to be found out for the Electronic media. Two potential options are available E-Cash and Electronic Signatures.
What are Electronic Cheques?
Electronic cheques are another form of Electronic tokens. They are designed to accommodate the many individuals and entities that might prefer to pay on credit or through some mechanism other than cash. Once registered, a buyer can then contact sellers of goods and services. To complete a transaction, the buyer sends a check to the seller for a certain amount of money. These checks may be sent using Email or other Transport methods. When deposited, the cheque authorises the transfer of account balances from the account against which the cheque was drawn to the account to which the cheque was deposited.
The electronic cheques are modeled on paper checks, except that they are initiated electronically. They use digital signatures for signing and endorsing and require the use of digital certificates to authenticate the payer, the payer’s bank and bank account. They are delivered either by direct transmission using telephone lines or by public networks such as the Internet.
Benefits of electronic Cheques:
• Well suited for clearing micro payments. Conventional cryptography of e-cheques makes them easier to process than systems based on public key cryptography (like digital cash).
• They can serve corporate markets. Firms can use them in more cost-effective manner.
• They create float and the availability of float is an important requirement of Commerce.
Advantages of Electronic cheques:
1. Similar to traditional cheques. This eliminates the need for customer education
2. Since Electronic cheques use conventional encryption than Public and private keys as in e-Cash, Electronic cheques are much faster.
The risk is taken care of by the accounting server, which will guarantee that the cheque would be honoured.
Disadvantages AND Legal Issues of E-Cash
1. E-Cash cannot be broken into smaller denominations.
2. The concept of maintaining a database of spent notes is very expensive.
3. Accessing Database of spent notes is also very time consuming.
4. Transaction based taxes account for a significant portion of state and local government revenue. If e-Cash becomes successful, then people will use it to buy things like cars and houses, which would not have been possible with actual cash. (One can’t physically carry so much of real cash)
5. Currency fluctuation is another issue related to e-Cash.
In the United States of America the Federal Reserve and the banking industry sought to decrease the banking system's dependence on the actual transport of paper cheques, as the 9/11 terrorist attacks had brought transportation and cheque clearing to a halt leaving $47 billion worth of cheques floating in financial limbo for days. Moreover banks, as well as vendors accepting a customer's payment of goods and services by cheques, view the long-established paper process as slow, costly and inefficient. This convinced the Federal Reserve Board to urge the creation of Check 21 and finally October 28, 2004
marked the beginning of an evolution in cheque processing. The Check Clearing for the 21st Century (Check 21 Act), federal legislation affecting all states, changed the method by which cheques were processed in the United States, and also changed the technology of cheque payment and acceptance. The Check 21 Act introduces new warranties, indemnities and special refund system called the Expedited Recredit which protects the customers from fraudulent presentation and processing of Substitute Cheques.
In the five decades since independence, banking in India has evolved through four distinct phases. The Indian banking industry is in the midst of an IT revolution. Combinations of regulatory and competitive reasons have led to the automation of the Banking Industry. The Reserve Bank of India has made several reforms for a safe and efficient electronic mode of payment, along with improved efficiency in the paper based mode of payments. In order to foster faster cheque processing the Central bank has implemented Cheque Truncation system in India on a test basis in the National Capital Region, in February 2008. Amendments to the Negotiable Instruments Act and the Informational Technology Act have been made to facilitate the smooth functioning of the
New technology. The introduction of the new technology does not change the method of writing the cheques. Government Departments may have to re-engineer their Codes and Manuals governing settlement of their cheques through legally valid electronic images instead of physical cheques. India is doing something very unique because it has a very large cheque volume. It processes about 1.2 billion instruments annually. The National Capital Region alone processes 6, 00,000 cheques in a day. Countries such as Singapore have 4, 00,000 instruments daily.
Thus the domain of Negotiable Instruments is too vast to be easily covered by the Bridging provisions of the ITA-2000. If any attempt is made in a halfhearted manner to bring virtual instruments under the ambit of RBI, we may end up with more confusion. The amendment of 2002, which provides due recognition to recognition to the concept of e-cheque, has not appealed to the characteristics, which are inherent to a cheque. The aspects of transferability, endorsements, holder-in-due-course of a cheque have totally been overlooked by the legislature. Therefore, there is a need of another amendment which gives due recognition to these.
The US system has many similarities to the Indian system excepting for the concept of "Substituted Cheque" which is not in India. It also has several consumer protection oriented regulations. The Indian law also appears to be strong on the other legal aspects of defining the presentation of truncated cheques and the protection for the collecting and paying bankers. It may one day be possible for payees to accept cheques just as credit cards and debit cards are accepted today. Even point-of-sale terminals – now being used for other applications - may possibly be image-enabled, so that truncated cheques may be viewed.
Another drawback of this concept is that due regard has not been given to those customers who are not conversant with the online transactions of the cheques. The provision has been introduced to bring convenience to the customers and faster working of the banking system. But, what about these customers, don’t they need this convenience and speed in their transactions? It is therefore suggested that, some kind of training program should also be conducted so that every kind of customer is able to take maximum advantage of any such development so that it appeals to the masses as a whole.
Nevertheless, a good initiative has been taken which needs due recognition, even though it has a few drawbacks. It is a very big step, which has been taken so as to bring in a very convenient and user-friendly method of conducting cheque transaction. The customers as well as the bankers with full support have welcomed it. Certain amendments would though make it a perfect piece of legislation. Today, many banks allow customers to carry out transactions online, such as funds transfers and payments to public utilities or specified business establishments. In a sense, electronic cheques will be a means for electronic funds transfer. The legal issues that may arise in the handling of electronic cheques will become clear as experience is gained in their use. But, the basic question is, is the idea of electronic cheque, introduced to improve a lot of benefits to the citizens? Or is it to provide more powers to RBI to control the Virtual world? These questions remain to be answered. What is clear however is that amending the negotiable Instruments Act is not a simple task. The legal position in the Meta society is too deeply embedded in both law and practice. The Cyber Society however has a very brief history of Practice which only the citizens are aware. The lawmakers in India are unfortunately not so conversant with such Practices and unless the so-called Task Force is of the citizens, the law cannot be one that would be acceptable by a wide section of the Cyber Society. In that sense the attempt to amend the NI Act may only remain a distant reality.
1. Bulletin issued by The Department of Payment and Settlement System of The Reserve Bank of India from the Central Office at Mumbai.
2. Indian Cheque Truncation initiative by Ravi Trivedi of the IBM Business Consulting Services.
3. Cheque Truncation- Business Opportunities by K.S. Bajwa
o General Manager- IT, Punjab National Bank
4. Bulletin issued by The RBI - RBI/2004-2005/28
o Ref: DIT.CO.No. 1/09.63.36/2004-05 - July1, 2004
o By: Rakesh Mohan
o Deputy Governor
o The Reserve Bank of India
5. Public Key Infrastructure Overview
o By JoelWeise - SunPSSM Global Security Practice
o Sun BluePrints™ OnLine - August 2001
6. Educational Review: "Understanding Check 21" and its Current Status published by Securities Industry Association
7. Educational Review: Distributed Check Processing in a Check 21 Environment
o Angie De Jesus, Marketing Director, Panini North America
o Michael Pratt, Principal, Impact Marketing LLC
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