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.
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