Professional Documents
Culture Documents
1. DEMAND DRAFT
Ø WHAT - The Demand Draft is a pre-paid Negotiable Instrument, wherein the Drawee
bank (the bank making the payment on behalf of drawer) undertakes to make payment
in full when the instrument is presented by the Payee (one who receives the payment)
for payment.
Ø WHY – DD is a pre-paid instrument. Therefore, the credit risk associated with the
payment is negligible.
Ø TELL ME MORE – RBI has made mandatory (w.e.f September 15, 2018) for the issuing
banks to incorporate the name of the purchaser on the face of a demand draft, pay
order and banker’s cheque.
o According to current rules framed by the central bank, any remittance of funds
by way of Demand Draft, NEFT/IMPS or any other mode and issue of travellers’
cheques for value of Rs 50,000 and above shall be effected by debit to the
customer’s account or against cheques, not against cash payment.
2. CHEQUES
Ø WHAT - A Cheque is a dated and signed document that orders Drawee bank to pay a
specific amount of money from a Drawer's account to the person in whose name the
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cheque (Payee) has been issued. The cheque is a type bill of exchange as per Negotiable
Instruments Act 1881.
(Picture similar to the above of DD. There are major three parties involved, bank being
the intermediary between drawer and payee)
Ø WHY – It is more convenient and a faster way to make monetary transactions. However,
there is a risk of default since it is not a pre-paid instrument.
Ø TELL ME MORE – There are various parties involved in the cheque-
o Drawer- The person/account holder who writes the cheque.
o Payee- Person on whose name cheque is written.
o Drawee- In cheque, drawer order their bank to draw money from his account.
The bank which holds drawer account is known as drawee.
o Validity- 3 months from the date of issue of cheque. (From April 1, 2012, RBI
reduced validity for Cheques, Drafts, Pay orders to 3 months from 6 months)
Ø Different types of cheques –
o BEARER CHEQUE – Bearer cheques are payable to the presenter or the bearer of
the cheque.
¨ He is authorized to collect the money.
¨ Endorsable
¨ No identification is required, thus risky.
¨ Example – A – Drawer, B – Payee
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¨ B can endorse the cheque to C and C can collect the amount from bank.
o BLANK CHEQUE – In this type of cheque, the drawer puts the sign on the cheque
and leave the other columns blank.
o ORDER CHEQUE – In this type of cheque, only the person whose name is
mentioned on the cheque is authorized to receive the payment.
¨ Secure and not endorsable
¨ Identification is required.
¨ If the word ‘or Bearer’ is replaced with the “or Order” in the bearer
cheque, then it becomes Order cheque.
o CROSSED CHEQUE - A crossed cheque is one which has two short parallel lines
marked across its face.
¨ In this type of cheque, the payee cannot withdraw money in cash but
money can transfer to the payee account.
3. DEMAT ACCOUNT
Ø WHAT - A Demat Account is an account that allows investors to hold their shares in an
electronic form without any physical papers held.
Ø WHY – To promote paperless transactions as it is difficult to hold shares in physical
forms.
Ø TELL ME MORE – Broadly, there are two types of Demat Account-
o Basic Services Demat Account (BSDA) - This account is designed for small
investors whose holding value of investment certificates or securities does not
exceed a couple of lakhs. Thus, the annual maintenance charge for this account is
lower.
o Regular Demat Account – This is a normal demat account which even a small
investor can open. Compared to BSDA the charges for this account are more, but
are worth it for the services and convenience it offers.
o For getting a demat account open, one needs to go to one of the Depository
Participants or DPs. DPs could be banks, brokers or financial institution that
have been allowed to provide this service. The Dps act as intermediary between
central depository and the investor.
o BENEFITS - eliminates the threat of theft, forgery, fake certificates, non-delivery,
etc., ease in buying and selling of securities, safe and convenient.
with bank branches at various locations within the jurisdiction of a ECS Centre by
raising a single debit to the bank account of the user institution.
o ECS Debit (Bulk Collection) is used by an institution for raising debits to a large
number of accounts (for instance, consumers of utility services, borrowers,
investors in mutual funds etc.) maintained with bank branches at various
locations within the jurisdiction of a ECS Centre for single credit to the bank
account of the user institution.
o There is no value limit on the amount of individual transactions done through
ECS Debit or ECS Credit.
5. LETTER OF CREDIT
Ø WHAT - A letter of credit is a letter from a bank guaranteeing that a buyer's payment to
a seller will be received on time and for the correct amount. In the event that the buyer
is unable to make payment on the purchase, the bank will be required to cover the full
or remaining amount of the purchase.
Ø WHY – Letter of Credit gives assurance to the seller that the payment will be made even
if there is default on buyer’s part mainly in International trade.
Ø TELL ME MORE – The Letter of Credit is issued once the credit worthiness of the Buyer is
checked.
o The Letter of Credit contains the name of the buyer, address, purchase details,
expiry date, transactional details, etc.
o They are less risky as banks conduct their own credit appraisal.
6. LETTER OF UNDERTAKING
Ø WHAT - It is a form of guarantee issued by a banking entity to a person concerned for
availing short term credit from the overseas branch of an Indian bank. These
transactions are not retail in nature and are mostly used by businesses for import of
goods
Ø WHY – The overseas bank lending to the borrower based on the LoU earns interest on
the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at
a place where he/she may not have banking relationships.
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Ø TELL ME MORE – The borrower uses her existing credit relationship with a bank in India
to avail the required credit outside the country. Banks ask for collateral or a guarantee,
which could be in the form of fixed deposits or other assets. If the bank is convinced, it
will issue an LoU, which when given to an overseas branch of another Indian bank would
result in release of the amount in foreign currency. This amount does not come in to the
buyer’s account directly; it goes to a specific bank account of your banker back home. It
is called Nostro account. You can then decide in whose favour the payment needs to be
done.
7. LETTER OF COMFORT
Ø WHAT - It is a written document that provides a level of assurance that an obligation will
ultimately be met.
Ø WHY – They are often issued as solvency opinions that the company will remain solvent
giving assurance to the seller.
Ø TELL ME MORE – They are very risky as they do not contain information like purchase
details, expiry date, name of buyer. A letter of comfort does not imply that the parent
company guarantees repayment of the loan being sought by the subsidiary company. It
merely gives reassurance to the lending institution that the parent company is aware of
the credit facility being sought by the subsidiary company and supports its decision.
8. MASALA BONDS
Ø WHAT - The Masala bonds refer to rupee-denominated bonds through which Indian
entities can raise money from foreign markets in rupee, and not in foreign currency.
Ø WHY – They are debt instruments used by corporates to raise money from investors.
Ø TELL ME MORE – The issuance of rupee denominated bonds, protects Indian entity
against risk of currency fluctuation, typically associated with borrowing in foreign
currency.
o The first Masala bond was issued by the International Finance Corporation (IFC),
the investment arm of the World Bank dubbed as Uridashi Masala Bonds in
November 2014.
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o The Housing Development Finance Corporation (HDFC) was the first Indian
company to issue rupee-denominated bonds “masala bonds” on London Stock
Exchange (LSE) in July 2016.
o International Financial Corporation was first time issued green masala bonds in
August 2015 to raise private sector investments that address climate change in
India.
o IFC named them Masala bonds to give a local flavour by calling to mind Indian
culture and cuisine.
o Chinese bonds being named Dim-sum bonds after a popular dish in Hong Kong,
o Japanese bonds named Samurai after the country’s warrior class.
Ø WHY – No need of physical instruments for payment, no need of visiting the branch,
cost effective and real time transfers. The settlement is immediate, final and irrevocable.
Ø TELL ME MORE – ‘Real Time' means the processing of instructions at the time they are
received rather than at some later time and 'Gross Settlement' means the settlement of
funds transfer instructions occurs individually (on an instruction by instruction basis).
o The RTGS system is primarily meant for large value transactions. The minimum
amount to be remitted through RTGS is ` 2 lakh. There is no upper ceiling for
RTGS transactions.
o The RTGS service window for customer's transactions is available to banks from
9.00 hours to 16.30 hours on week days and from 9.00 hours to 14:00 hours on
Saturdays for settlement at the RBI end. But it varies from bank to bank.
bank or different specified banks. The transfer can be done using mobile phones or the
Internet banking facility at any time, including Sundays and bank holidays.
Ø WHY – It offers an instant, 24X7, interbank electronic fund transfer service through
mobile phones. IMPS facilitate customers to use mobile instruments as a channel for
accessing their bank accounts and put high interbank fund transfers in a secured manner
with immediate confirmation features.
Ø TELL ME MORE – This service is offered by National Payments Corporation of India
(NPCI).
o The Mobile Money Identification Number (MMID) is required of the
beneficiary.
o Mobile Money Identification Number (MMID) is a seven digit number of which
the first four digits are the unique identification number of the bank offering
IMPS.