Tuesday, November 24, 2015

The recruitment paradox - Why good people are difficult to find

The complaint that, "There is a tremendous shortage of skilled/qualified/good people" is heard all too frequently from those who are on the lookout for suitable people to employ. Yet, I see around me qualified people not getting the opportunities they deserve. The fault, as the saying goes, lies somewhere in between. The following true incident may provide some insight into this paradoxical situation.  
This story has its beginning in early 1999 when a front-line commercial bank in East Africa appointed a London based, globally reputed, executive placement firm to recruit a managing director and CEO for itself. Three applicants were short-listed. They were invited to visit East Africa separately, and individually meet the members of the board of the bank. One of the three, an American, was finally selected to head the bank. He assumed office in September 1999.
Within a fortnight of taking charge, an e-mail went out from his desk to everyone in the bank. The subject line read: “Stop the music”. In his message to all employees, the new managing director asked everyone to refrain from making new demands on him for decisions on one thing or another. Essentially - no new customers, no new business, no new advances, no new contacts, no new individual strategies and no new initiatives. He asked everyone to focus on first strengthening the foundation and gearing up its infrastructure before going out to build business. (Let me add here that the bank was not on fire. Its financials were sound; it was already running quite well when he joined the bank.)
Committees were formed to review, re-think, re-strategise, restructure, re-organise and re-build an uniform, focused corporate structure. Meetings were seen to be held every day, at almost every corner of the organization. One general manager was removed from heading operations to writing operation manuals. The HR manager was instructed to come up with a totally new HR policy document for the bank. Others were similarly engaged.
So it went on for months. “No isolated, ad-hoc new initiatives till we – as an organization - are ready in all respects” was the message that went out over and over again. In one instance, the treasury was pulled up for grabbing a simple inward remittance business of around a million dollars that came their way (who could blame them!). Reason? The bank was yet to finalise and formally approve its marketing and business policies. 
Business, income, and profitability plummeted. Months down the line the staff, the customers, and the market – everyone was confused. After drifting aimlessly for some time, senior executives began to leave. Finally, the board of the bank acted. The same board that had appointed him a little more than a year ago, asked him to resign.
What had gone wrong? Primarily, three things. One, the candidate did have banking experience, but that was gained only in highly developed countries – far removed from the environs of countries like Africa. Second, his banking experience was dated. For, he had been away from practical banking, working only as a consultant - attached to a number of consulting firms - for the last 20 years. Three, unfortunately for him and for the bank, he was just not able to take off the hat of a ‘consultant’ that he had been wearing for the past 20 years. He failed to see himself as the bank’s chief executive and the ship’s captain.
This begs the next question: Who had gone wrong? To start with, the executive search firm. The candidate had only himself and his experience to offer, which I am sure he did. It was actually the job of the recruiting agency, mandated by the bank concerned, to determine the candidate's suitability for the job. It failed in its duty to do so. The consulting agency’s failure - to select the person with the right profile and attitude - was further compounded by the bank’s board. It tried to select a CEO for the bank - without having a single person on its board with a minimal, or passing, knowledge of commercial banking. Even though the board members met the short-listed candidates face to face, it failed to appropriately evaluate the experience or the psychological profile of the candidates.
Thus, a top-rung executive search firm made a glaring error in discharging its obligations. On its part, the bank’s board also attempted to achieve something it was not equipped to do, or was capable of doing.
Is it any wonder, therefore, that we hear a never-ending lament about perennial shortage of ‘the right people’? Most employers, unfortunately, expect ‘the right people’ to be available ‘off-the-shelf’ – tailor made, custom built, ready-to-use, able to ‘hit the ground running’. That is rarely the case – even with senior executives. However, for argument’s sake, even if we agree for a moment that candidates were like ready-to-eat, pre-cooked food (any thought about who was supposed to do the ‘pre-cooking’?), my experience tells me that the fault lies more with those who are directly involved with the recruitment game. In reality, good people – yes, the ‘right ones’ - are available, in sufficient numbers too. Most of us do not know how to find them. 
Take the case of the placement agencies. Ideally speaking, on getting an assignment to fill up a vacancy, the agency ought to first do its homework well. Among other things, it should strive to understand the organization and its work culture, its style of management, performance parameters, how success is measured within the organization, the job profile, the profile of the person most suited for the job, the career path, etc. For, these issues are of great importance to the prospective candidate, and hence, to the organization, if the marriage is to be a success.
Another error that most placement consultants and personnel managers commit is in not spending some time and effort to build up a ‘candidate profile’. What sort of people are they really looking for? What attitude does the position demand? They fail to realize that the attitudes of people at various positions differ widely – from one organization to another, from one position to another. For example, does the organization need an opening batsman or a middle order player? Even for the opening batsman – would he be playing in a test match or in one-dayers? Their styles and requirements will, no doubt, differ.
Unfortunately, majority of the placement consultants turn out to be only ‘head hunters’, literally. Like the one in the story that I began this article with, the ‘head-hunters’ believe that their business is only about pulling people out of one job and placing him in another, and pocketing the search fee. They do not do the home work that is essential in this kind of business. Accountability is, therefore, virtually non-existent.
Another area that does not get its due attention is the proper analysis of CVs received. Here too, those responsible fail badly. We read tomes on how to write effective CVs. Never once have I heard about developing the skills required to properly ‘read’ (i.e. interpret) a CV. The HR Manager, the personnel manager, or the consultant in charge of the client portfolio in a placement agency – they generally delegate the responsibility to sort out and short-list candidates to a junior staff who, more often than not, is ill-equipped to do the job. He has little idea about the requirements of the job, the required profile of the candidate, or is short on the skills required to separate the wheat from the chaff. For all one knows, a good candidate could get the short-shrift at this stage itself. I have seen it happen far too many times to be convinced otherwise. 
There are a number of search firms who claim to be sector specific. But rarely do they have on their rolls top level, highly experienced professionals who are simultaneously skilled in the art of ‘reading’ CVs, and in interviewing potential recruits for a specialized position. Do these professionals ever do the short-listing themselves? During interviews, do the head-hunters look for only the minimum fit, or for the best possible candidate – and no compromises? At what stage do the placement consultants begin to look for other attributes in the candidates, viz. their IQ, their EQ (emotional quotient), their ability to work in a team environment, that fire in the belly, originality, latent leadership qualities, and so on? At what stage does the Personnel/HR manager or the functional head get involved?
One must realize that almost everyone pays a price for any wrong selection. The person so recruited, once already destabilized, would eventually end up being back in the market, job hunting. In consequence, the manpower planning, and hence the growth process of the organization, would simultaneously suffer a serious setback too. The after-effect of a ‘sack’ is never pleasant for the people within the organization, the organization itself, or the person directly affected. The one who escapes relatively unscathed is the placement consultant. I have rarely seen them assume a share of the responsibility and offer to compensate the organization (not to speak of the victim of a misjudged recruitment) in one way or another.
Till the recruitment process is toned up, the people responsible for manpower selection, within and outside the organization, do their homework properly and with sincerity, approach each placement with the seriousness it deserves, the gulf between the vast pool of talent still going untapped and organizations perennially in search of the ‘right people’, will never be bridged.

Friday, November 13, 2015

A few steps to better video

The digital era brought about a sea change in the way we did things. Among others, it has seriously influenced the art and craft of photography. When digital photography came, a storm ensued. The battle was essentially between the analogue methods, the film rolls against digital techniques. It was the same when polyvinyl records had to make way for compact disks. Transition was not easy to accept, but technological development finally won the day.

Major change has taken place in the way we capture still or moving images. Still cameras have not changed much outwardly in their shape, size or weight. The change is more evident in movie or video cameras. The compact, light-weight video cameras practically rule the world of amateur photography. No tourist leaves home without a camera that can shoot stills or videos or both. With the changing times, the compact digital cameras are now under serious threat from the mobile phone cameras.

High degree of automation have ensured that– notwithstanding the photographer’s skills, or the lack of it – the end result from still cameras is (automatically) of quite high quality. This does not, however, extend to videos. For videos, it is still mind over matter. Shooting a good quality video demands a certain level of skill without which the final product is no better than that by a child with a Handycam (it’s in danger of becoming a generic term). Moving images follow a language that differs from how still images are shot. Remember that you are using an audio-visual medium. The grammar is altogether different.

Holiday or marriage videos, or of children having fun or on the stage, would be much more satisfying if a few simple rules for shooting video are kept in mind. Here are only a few suggestions, in no particular order of importance (they all are!). Here goes:

1)     Your camera has no brain. Humans see with their mind’s eye. The brain plays a significant role here in how we see things. The wide angle that the eyes can cover without distortion cannot be matched by the small lenses or the tiny CCDs of the hand-held, low cost video cameras. These shortcomings must, therefore, be overcome in other ways.
2)     Tell a story: The sequence of shots when strung together should tell a story. All stories, however brief or lengthy, have a beginning, middle and an ending. So plan ahead every shot. Think of the story in your mind and shoot accordingly. Even if you create the story on the editing table, you must have the footage to edit in the first place. So, don’t shoot first and think afterwards.
3)     Don’t use the camera to search for scenes: Do not use your video camera, while it is still in ‘record’ mode, to move rapidly from one object to another, looking for what to shoot next. Instead, let your eyes do the search-and-locate what to shoot. Even if you are going to edit it out later, it’s a waste of time, energy and opportunity. Use your mind and your eyes instead.
4)     Select your shot with care. Whether it’s a stage show or a travel video, first select carefully the scene that you wish to capture. Zoom in or out till you have the scene just the way you want it for being viewed by people later. Plan where to start the shot, when and where to end it, and what it is to show in between.
5)     Avoid long takes. People want to see action. The mind will keep waiting to see what happens next. Each shot must take the story forward, bit by bit. If nothing happens for too long, the viewer will get bored. For shooting churches, towers or palaces – objects that do not move – frame your shot just the way you want it, aim and hold the camera rock-steady, switch on ‘record’, count up to six seconds, switch off. Repeat the process for all non-moving objects. For us amateurs, short is sweet. Long, lingering slow-mo shots are for top directors. So, keep it short for now.
6)     Avoid rapid camera movement. While shooting stage shows, for example, the temptation is to try and capture as much of the action as possible. The camera ends up flitting from performer to performer, zooming in or out, giving the viewer hardly enough time to absorb any particular scene well enough before the scene changes, sometimes all too quickly and all too often.
Once again, avoid this by selecting your shots with care. Selecting a strategic place to place your tripod can help in better coverage. Without any shake of the camera, follow the performer as he or she moves on the stage. Zoom out very carefully, very slowly, very smoothly when you want to capture all the performers together, Then zoom in, once again very slowly, on to the performer you want to capture next. Move smoothly with the performer, holding him or her steady in the frame of your video camera.
7)     Give leading space. Once again, the mind plays an active role here. So, when the actor or performer moves from left to right, 2/3 of the frame in front of the moving person should be empty. Similarly, when the actor moves from right to left, make sure that he is positioned within the right 1/3 of your camera frame, not on the extreme left end of the camera frame. The space in front of him, in the direction of his movement, must be empty. Give him/her space to move towards.
8)     Do not pan. A perfect panning shot needs oodles of patience, and a rock-steady hand. Having a tripod or a monopod around helps. If the whole scene looks too beautiful for words, take a long shot (for six seconds max, remember?) to capture the whole scene. Next, break down the scene into smaller segments in your mind. Select the scenes that you want your friends back home to enjoy, frame it mid-range or close-up, switch on ‘record’ mode (for six seconds). Switch off and move to the next scene.
9)     Do not zoom. Sounds strange? But it’s true! Zooming, like panning, too needs plenty of patience, a steady hand, but serves no practical purpose. A 40X zoom is sure to test the patience of your viewer. So, avoid zooms, except when the camera is switched off. Use the zoom button to frame your shot exactly the way you wish, before you switch to the ‘record’ mode, or after you have switched it off, never during recording. Use zooms to bring distant objects closer, like when shooting animals or birds in the wild.
10)  Remember the lighting and the angle: Insufficient light, light behind the subject, light source directly in front of your camera lens, the sun directly overhead on a clear, bright day – these do not help your cause. Analyse your shots to understand how to get the best out of the available natural or the artificial lights. Select the angles of your subject accordingly.

Good books are available in the market on video shooting techniques. The internet, too, is a rich source of helpful hints. Read up as much as you can if you do not want your acquaintances to make excuses to slip away whenever you want to show them your videos. Remember, anything worth doing at all, is worth doing well.

I have found great joy in shooting still and video. But I found even greater joy when I learned (on my own) how to edit my videos. It opened up a whole new creative world for me. In fact, learning to edit improved my video shooting skills. Nowadays, I am eager to travel more just so that I can use my cameras, remain unobtrusive while taking my time to get the shots I am looking for, stitch them into a final video presentation, adding captions and some background music, and share with my family and friends. It’s a creative process, and extremely satisfying. 

If you have read this to the end, you are obviously as interested in photography as I am. I wish you all the best. Enjoy, and have lots of fun!

Wednesday, November 04, 2015

What is ‘negotiation’, and why it must stay in the UCP

Introduction
There is no formal announcement from the International Chamber of Commerce (ICC) as of date, no preparatory move, no action at all on this front. No matter. The brainstorming has begun in right earnest! Intensive discussions are taking place on what changes are desirable in the next version of the Uniform Customs and Practice for Documentary Credits (UCP), an ICC publication that lays down the rules for the operation of documentary letters of credit (LC). This article examines only a few of the proposals that have been put forward in recent times.

The proposals
The suggestions are to:
a)     delete all references to drafts from the UCP
b)    merge the UCP with ISBP
c)     make the ISBP and the ICC Banking Commission Opinions available through the electronic medium to all (if it must be so, at an affordable price)
d)    purge ‘negotiation’ from the UCP and the ISBP.

Drafts
The angst against drafts is understandable. It emanates primarily from the fact that only a handful of people around the world seem to understand what a draft (a bill of exchange, a negotiable instrument) is all about. Well, I agree that the UCP and the draft should head for a divorce, but for the lack of understanding. The reason is because drafts follow a different drummer. Drafts are statutorily governed, by the Negotiable Instruments Act or the Bills of Exchange Act, howsoever called in the country concerned. The ICC has no control over the rules for drafts. This tiny fact of life goes against the very spirit of a letter of credit, which is structured as a completely independent, stand-alone instrument of payment, governed exclusively by the provisions of the UCP.

The transition is not going to be smooth. Some divorces are messy. This one could be too. It would be tricky and painful, to say the least. Re-drafting of the UCP, unlearning and relearning by the trade professionals, would surely be a tough ask. And we are not done yet! Add to this the call to rid the UCP of negotiation, and what could we have on our plate?

Proposal to merge ISBP with the UCP
A suggestion being discussed is to merge the UCP and ISBP into a single rule book. It does not appear to be a good idea. The steel-frame that defines the rules of the game for LCs ought to remain as it is at present. The sanctity of the UCP rules should not be diluted. The explanations, clarifications, illustrations or ICC Opinions are not ‘rules’ by any stretch of our imagination. These should continue to be separately available, as they are now, flexible enough to be open to changes as required.

Get rid of negotiation?
“Get rid of negotiation” is not a new call to action. ‘Negotiation’ remains a riddle wrapped in a mystery inside an enigma ever since it first appeared in the UCP. It seems to have defied understanding, or attempts at arriving at a definition acceptable to all. Yet, it survives to exist in the UCP to this day. This article takes up the cudgel on behalf of the much debated and berated term, and explains why it must continue to remain in the UCP. To fully understand the reasons, one needs to refer to the concepts that govern the laws of contract, more specifically the inter-se relationship between the agent and the principal. A bit or risk management issues thrown in may cause no harm either!

Letter of credit and contracts
In two articles[1] of mine I had pointed out that the UCP very clearly reflected the provisions of the laws of contract. Particular attention is invited here to the following aspects:
  1. Offer: An explicit commitment in writing of the issuing bank to honour a presentation if it complies with the terms of the credit.
  2. Acceptance: Of the proposal – by way of specific performance of the terms of the LC, namely, a complying presentation.
  3. Silence is not acceptance: “A statement made by or other conduct of the offeree (the one to whom an offer is made) indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.” (Article 18(1) of the UNCISG)
Article 7 of the UCP defines the undertakings of the issuing bank. Note that the UCP does not require the beneficiary to communicate, explicitly or implicitly, acceptance of the terms of the contract (the LC). The beneficiary’s performance – a complying presentation – is sufficient indication to the offeror, viz., the issuing bank, the fact of the beneficiary’s acceptance of the offer. The very act of a complying presentation binds the issuing bank (sub-article 15.a) to its promise under its own contract (the LC) to the beneficiary to pay the agreed consideration.

If there is no ‘acceptance’ of the offer by the offeree (the beneficiary of a credit) by way of specific performance (a complying presentation), the issuing bank has no obligation to pay either (sub-article 16.a).
Incidentally, sub-article 10(b) of UCP 600 is another example of the same principle. This sub-article provides that the beneficiary should either “give notification of acceptance or rejection of amendment.” Where it does neither, it can still indicate acceptance of an amendment by making a presentation that complies with the not yet accepted amendment. The acceptance of the offer is thus through action, if not through so many words. The issuing bank will still be bound by its commitment to the offeree, the beneficiary.

The principal and the agent
Chapter X of The Indian Contract Act 1872 deals with ‘Agency’. Our interest is limited to the following provisions (summarised):
  1. The authority of an agent may be expressed or implied.
  2. No consideration is necessary to create an agency.
  3. No one can be forced into entering into a contract of agency.
  4. An agent who acts within the scope of authority conferred by his or her principal binds the principal in the obligations the agent creates against third parties.
The nominated bank
We know that the offeree cannot be compelled to accept an offer, i.e. perform under a credit. A non-confirming nominated bank too occupies a similar status in the UCP. Even if nominated by the issuing bank, it is under no obligation to negotiate or to honour even if a presentation complies (sub-article 9.a). The non-confirming nominated bank need not comply with the provisions of article 16 of the UCP either.
Section 8 of the Indian Contract Act reflects UNCISG while it states,

“Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.”

Thus, if the beneficiary performs as per the LC terms, the issuing bank is obligated to meet its commitment as per its undertaking in the credit. Similarly, if the nominated bank negotiates a complying presentation, it earns the right to be reimbursed by the issuing bank (sub-article 7.c).

Purchasing or discounting bills for collection
A significant part of the business activity of commercial banks comprises advancing against domestic or export bills outward. Banks advance money against bills sent on ‘collection basis’ (refer to URC 522) by purchasing DP bills, discounting DA bills or permitting overdrafts against the underlying goods in transit. To advance against these bills (post-shipment finance) is a credit decision of the lending bank. The decision to advance money is based on various parameters, of which risk management is a very important criterion. Granting advance is an arrangement wholly between the drawer (seller) and his bank. No other party is involved in this decision, or in the risk management exercise, of the lending bank.

Defining negotiation
The risk analysis scenario changes significantly when documentary credits enter the picture. The issue to lend or not to lend now has a third element to consider, namely, an undertaking of another bank through a letter of credit. It brings to the table the commitment of the issuing bank which “undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank (sub-article 7.c UCP 600)”. It’s no more bipartite, but a tripartite arrangement now.
Keeping in mind what we have discussed about the laws of contract, let us view the issuing bank as the principal and the bank that acts under its nomination as the agent. Irrespective of its commitment to the beneficiary (as per the terms of the credit), the issuing bank is simultaneously bound by its commitment to its agent – the nominated-cum-negotiating bank. The remaining part of sub-article 7(c) beautifully captures this essence, thus:

“Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.”

The laws of contract by another name? You bet!

Viewed in this light, the meaning and the implication of the term ‘negotiation’ becomes abundantly clear. It is also apparent why negotiation (a tripartite arrangement) cannot be equated with discount or purchase (a bipartite issue); why one cannot be jettisoned in favour of another.

Negotiation and risk management
Documentary credits occupy a special place in the world of international trade. The major advantage of a letter of credit is that owing to its very nature it helps to reduce several risks inherent in international trade of goods and services. Consequently, the beneficiary of an LC is deemed a better credit risk than one without it. In terms of risk exposure, the availability of an LC makes the transaction less risky for the lending bank (and hopefully one day, for the CAR). For reasons of lesser risk exposure, an exporter pays a reduced premium to obtain export risk insurance cover.

Almost every country around the world is keen to develop its volume of external trade through export. Documentary credits are a major facilitator in this direction. Without the benefits of negotiation, a major incentive for procuring LCs by the exporter would surely disappear. LC bills will look more like collection bills, with added problems of higher charges and complicated compliance issues thrown in for good measure.

As an instrument for the settlement of international trade, documentary credit is already under threat from several quarters. If negotiation is removed from the UCP, the demise of the most preferred and reliable instrument for settlement of cross-border trade will simply be accelerated. Will that help in the development of international trade? Hardly, in my opinion!

UCP sans ‘negotiation’: a few afterthoughts
A documentary credit world without ‘negotiation’ does not appear to be very encouraging, to say the least. If one indulges in a speculation spree, possible consequences could be as follows:
  1. Lending by the nominated bank against export bills under LCs will not receive the protection of the UCP any longer.
  2. Without the benefit of negotiation, the seller’s bank will be more reluctant than before to lend by way of post-shipment credit.
  3. The term ‘complying presentation’ may be relevant to none barring the issuing bank.
  4. Would there be any need for a bank to be nominated?
  5. Several articles, including article 38 on transferable credits, would have to be re-written or modified to remove all references to nominated banks, negotiation and everything related to these.
  6. Would the exporter’s bank, or the nominated bank (if any), have any incentive or compelling reason to examine the documents presented for compliance?
  7. If drafts go, terms such as at sight, acceptance, acceptance credits or sight payment would have to be removed from the UCP; the affected articles must then be completely revised. Reliance on the bills of exchange laws for definitions of these terms must be carefully, meticulously, and consciously avoided. Hence article 2 would also have to be expanded.
  8. No negotiation means no reimbursement. Would we need article 13 or the URR?
  9. The entire UCP will be reduced in size, to barely a few brief articles. For example, article 7 will retain only sub-article 7(b). Articles 14 and 16 will be of interest only to the issuing bank. Article 15 could be deleted. The impact will affect the ISBP is a similar fashion.
  10. What about Article 8 on confirming bank undertaking? What would be the responsibilities of a confirming bank anyway? Will it be negotiating without recourse, or honouring a complying presentation? Will sub-article 8(b) mean anything to anybody any more in the documentary credit world?
  11. The sale of the ICC publications like the UCP, the ISBP or the ICC Opinions could plummet, since their demand may shrink, or be confined to the issuing banks alone.
  12. And finally, would the time, the effort, the resultant confusion and the cost of the entire exercise be really worth it?
It goes without saying that I would be happy if I am proved wrong on all counts.

“Off with his head”, said the Queen
A curious approach is evident in some quarters for solving problems that defy their understanding. Whether it’s Queen Margaret (Henry VI Part III, Shakespeare) or the Queen (in Alice's Adventures in Wonderland by Lewis Carroll), finding solutions to any problem was to simply declare, “Off with his head”! Now we hear something similar, thus, “I don’t know what this thing called draft is, so let’s chop it off from the UCP.” Or, “I don’t have any idea what negotiation means. Why not remove it altogether from the UCP?” Voila, problem solved!

Conclusion
Change for the better is always welcome. But we must be capable of managing that change. Eight years on, many trade professionals are yet to fully wrap their heads around the UCP provisions. Huge deficiencies already exist in terms of skill levels and in the dissemination of information at all levels across the industry. The knowledge and information gaps may be too wide to bridge easily or smoothly. Unless handled well, any drastic change could be counter-productive. The ICC, unfortunately, does not appear to play a leading role in actively addressing or resolving these deficiencies, at least not in India. A couple of elite conferences in a year do not help. Owing to the implications, suggestions for changes in the next UCP should, therefore, be thought through with great care. Recall the (supposedly) Chinese curse, “Be careful about what you wish for; you might receive it!”
****





[1] Some random thoughts on the UCP, LC Monitor-Trade Services Update, Special Edition, January 2011 and Negotiation and the law of contracts, DC Insight, Vol. 16, No. 2, April-June 2010.

Sunday, November 01, 2015

Time to bid good-bye to bank drafts?[1]


Most of us are familiar with negotiable instruments such as cheques, bank drafts (demand drafts or DDs) and payment orders (PO). These are instruments of payment. The difference among these traditional payment instruments is marginal. Generally speaking, a cheque is issued by an account holder on the branch of the bank where the account is maintained. In the case of a bank draft, the account holder (drawer, issuer) is that branch of the bank itself – drawing on another branch of the same bank. For payment orders, the account holder is also the branch of the bank, but drawing on itself. If one wishes to acquire a bank draft or a PO, one would have to first pay an equivalent amount (plus bank charges, if any) to the issuing bank. The DD or PO is issued against the amount received from its customer, the purchaser. The face value of the instrument is thus locked and secured till the payee claims the amount.

Drafts serve a very useful purpose for the transfer of funds within a country. (It’s to be noted that what generally are termed as foreign currency ‘drafts’ are in fact cheques.) Drafts, being physical instrument unlike telegraphic transfers, take a little longer, but are a very reliable and secure mode available to the common man. Depending on the geographical distance that separates the purchaser from the beneficiary, the purchaser may request for either a DD or a PO (also called banker’s cheque or cashier’s cheque) from the issuing bank.
From the point of view of the payee or the beneficiary, a cheque carries the maximum element of risk or uncertainty of payment. Drafts or POs, on the other hand, offer a high degree of safety because both the drawer and the drawee themselves are banks; the face value is also locked till claimed through the banking system. Precisely for these reasons institutions and organisations invariably stipulate that payments to them were to be made only through the means of bank drafts. For obvious reasons, personal cheques are not acceptable. Apart from the time it takes for any of these instruments to travel from the purchaser to the beneficiary, receipt of actual funds must be processed through the inter-bank fund settlement mechanism called ‘clearing’.

With the advent of centralised (or, core) banking in India, the rules of the game have changed. Among the multitude of developments, nearly all cheques nowadays bear a legend to the effect, ‘Payable at par at all our branches in India’, ‘Payable at par at all branches of xxx bank’ etc. Internally, the reconciliation process has become very much simpler. Yet, whether a cheque, a draft or a PO, the clearing system and the consequent delay are still unavoidable.

Development in technology, communication, the advent of centralised processing and ‘at par’ instruments are just a few signs of the times. It’s a fact that drafts and payment orders as payment instruments offer very similar degrees of security to the payee. Yet, the institutions continue to demand only drafts as the most preferred mode for receiving payment. May be the time has come for the commercial banks to seriously consider merging the draft and the banker’s cheque to create a single instrument of payment. Organisations should simultaneously wean themselves away from drafts, and ask only for banker’s cheques from the public, if not for direct credit to their accounts by electronic fund transfer. Paperless remittances should be the way to go.

In the interim, whether local or outstation, instead of DD or PO, why shouldn’t a cheque marked ‘payable at par’ be acceptable as payment? Both must necessarily be settled through the local clearing mechanism, taking the same amount of time! A DD or a banker’s cheque offers only marginally more comfort over cheques. But none of them is good enough (or safe enough) till actual credit of funds to the payee’s account. The change in the mind-set could translate in to savings in terms of bank charges, time and trouble to procure these instruments from banks.




[1] Posted on LinkedIn on 26 October 2015.