Electronic Payments and Dishonour of Electronic Funds Transfers (Payment and Settlement Systems Act, Section 25)

Most payments in India now move electronically: through NEFT, RTGS, IMPS, UPI and automated debit mandates. The Negotiable Instruments Act recognises electronic and truncated cheques, but an electronic funds transfer is not a cheque. When an auto-debit instruction for a loan instalment fails for want of funds, Section 138 does not apply. Parliament filled that gap in Section 25 of the Payment and Settlement Systems Act, 2007, which creates an offence modelled on Section 138. This note explains the electronic payment framework and that offence.

1. The Payment and Settlement Systems Act, 2007

Regulator: the Act designates the Reserve Bank of India as the authority to regulate and supervise payment systems.
Authorisation: no one may operate a payment system without RBI authorisation, except the RBI itself.
Systems covered: cheque clearing, NEFT, RTGS, IMPS, UPI, card networks, prepaid instruments and the National Automated Clearing House (NACH), through which ECS and e-mandate debits are processed.

2. The Offence in Section 25

Section 25(1), Payment and Settlement Systems Act, 2007

Where an electronic funds transfer initiated by a person from an account maintained by him cannot be executed on the ground that the amount of money standing to the credit of that account is insufficient to honour the transfer instruction or that it exceeds the amount arranged to be paid from that account by an agreement made with a bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the electronic funds transfer, or with both.

The proviso requires that:

(a) the transfer was initiated for the discharge of a debt or other liability, which the Explanation defines as legally enforceable;
(b) it was initiated in accordance with the procedural guidelines of the system provider;
(c) the beneficiary gave a written demand within 30 days of receiving information from the bank of the dishonour; and
(d) the person initiating the transfer failed to pay within 15 days of receiving the notice.

3. Parallels with Chapter XVII

Presumption of debt (Section 25(2)): the transfer is presumed to have been for the discharge of a debt or liability, as under Section 139 of the NI Act.
No defence of honest belief (Section 25(3)): it is no defence that the person did not believe his account would be insufficient, as under Section 140.
Bank's communication (Section 25(4)): the court presumes dishonour on production of the bank's communication, as under Section 146.
Chapter XVII applied (Section 25(5)): the provisions of Chapter XVII of the NI Act apply "to the extent the circumstances admit", so rules on cognizance, limitation, companies, summary trial and compounding are carried across.

4. Where Section 25 Applies

Auto-debit mandates: the most common use is the dishonour of ECS or NACH mandates for loan EMIs, insurance premiums and subscriptions, where the borrower's account lacks funds on the debit date.
Initiated by the account holder: the transfer must be initiated by the person from his own account, including by a standing authorisation or mandate.
Cheques still under the NI Act: dishonour of a cheque, including a truncated cheque cleared by image, remains governed by Section 138.

5. Electronic Cheques and Clearing

Separately, the NI Act itself was adapted for electronic banking in 2002: the definition of cheque includes the electronic image of a truncated cheque and a cheque in electronic form (Section 6), and Sections 64, 81, 89 and 131 deal with presentment, retention, alteration and collection of truncated cheques. Clearing runs through the Cheque Truncation System (Topic 8).

⚠ Key point

The Payment and Settlement Systems Act, 2007 makes the RBI the regulator of payment systems and creates, in Section 25, an offence for dishonour of an electronic funds transfer initiated from one's own account for a legally enforceable debt, for insufficient funds or exceeding arrangement, punishable with up to two years, fine up to twice the amount, or both, subject to compliance with the system provider's guidelines, a written demand within 30 days and non-payment within 15 days. It carries presumptions like Sections 139, 140 and 146, and applies Chapter XVII of the NI Act so far as possible. It is used mainly for dishonoured ECS and NACH mandates.

6. Related Topics and Provisions

Cheque, including electronic and truncated cheques (Topic 8)
Ingredients of the Section 138 offence (Topic 42)