Banking Important Terms Part 3

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Table of Contents
DEMAND DRAFT ...................................................................................................................................... 5
CHEQUES ................................................................................................................................................. 6
DEMAT ACCOUNT .................................................................................................................................... 9
ELECTRONIC CLEARING SCHEME ............................................................................................................ 10
LETTER OF CREDIT.................................................................................................................................. 10
LETTER OF UNDERTAKING ..................................................................................................................... 11
LETTER OF COMFORT ............................................................................................................................. 12
MASALA BONDS .................................................................................................................................... 12
NATIONAL ELECTRONIC FUND TRANSFER (NEFT).................................................................................... 13
REAL TIME GROSS SETTLEMENT (RTGS).................................................................................................. 13
DIFFERENCE BETWEEN RTGS AND NEFT ................................................................................................. 14
INTER-BANK MOBILE PAYMENT SERVICE (IMPS) .................................................................................... 15
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.
• 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 affected by
debit to the customer’s account or against cheques, not against cash
payment.
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 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-
• Drawer- The person/account holder who writes the cheque.
• Payee- Person on whose name cheque is written.
• Drawee- In cheque, drawer order their bank to draw money from his
account. The bank which holds drawer account is known as drawee.
 • 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 –

• BEARER CHEQUE – Bearer cheques are payable to the presenter or the
bearer of the cheque.
o He is authorized to collect the money.
o Endorsable
o No identification is required, thus risky.
o Example – A – Drawer, B – Payee
o B can endorse the cheque to C and C can collect the amount from bank.

• BLANK CHEQUE – In this type of cheque, the drawer puts the sign on the
cheque and leave the other columns blank.
• ORDER CHEQUE – In this type of cheque, only the person whose name is
mentioned on the cheque is authorized to receive the payment.
o Secure and not endorsable
o Identification is required.
o If the word ‘or Bearer’ is replaced with the “or Order” in the bearer cheque,
then it becomes Order cheque.
• ANTE-DATED CHEQUE - If Cheque is issued by drawer prior to the date of
signing a cheque, this type of cheque is known as the Ante-Dated cheque.
Suppose today is 15/2/2018, but the cheque has been dated 1/2/2018.
• POST-DATED CHEQUE - If the cheque issued by the drawer to the payee for
the upcoming withdrawn date, this type of cheque is known as the Post-Dated
cheque. Suppose today is 15/2/2018 and the cheque has been dated
15/3/2018.
• COUNTER CHEQUE – These are the non-personalized cheques given to the
customers. These cheques carry only the name of the bank. They are
sometimes referred as the synonym of Blank cheques.
• STALE CHEQUE – Cheque which is presented at the bank after three months
of its issued date is known as Stale cheque.
•

• CROSSED CHEQUE - A crossed cheque is one which has two short parallel
lines marked across its face.
o In this type of cheque, the payee cannot withdraw money in cash, but
money can transfer to the payee account.
 • OPEN OR UNCROSSED CHEQUE - A cheque that is not a crossed cheque.
The person whose name appears on the cheque can write the name of
another person on it, and the money will be paid to them.
• SELF CHEQUE – When the person/drawer writes the cheque in its own name,
usually to take the money in physical form, is known as self cheque.
• GIFT CHEQUE – It is the decorated cheque given by the bank, when
customer demands for it, for small amount of charge.
• MUTILATED CHEQUE – If the cheque is torn into two or more pieces, then it
is known as Mutilated cheque. The bank will not make payment against such
cheques without getting confirmation from the drawer.
• TRAVELLER CHEQUE - These type of cheques are used for withdrawal of
money while travelling. These cheques can be encashed abroad where
foreign currency is normally acceptable.
• AT PAR CHEQUE – It is acceptable at all its branches across the country.
• BANKER’ S CHEQUE - The banker’s cheque is an instrument issued by the
bank on behalf of customer containing an order to pay a certain sum to a
specified person within the city.

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-
• 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.
• 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.
 • 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.
• BENEFITS - eliminates the threat of theft, forgery, fake certificates, non-
delivery, etc., ease in buying and selling of securities, safe and convenient.

ELECTRONIC CLEARING SCHEME

Ø WHAT – ECS is an electronic mode of payment / receipt for transactions that
are repetitive and periodic in nature. ECS facilitates bulk transfer of monies
from one bank account to many bank accounts or vice versa.
Ø TELL ME MORE – Primarily, there are two variants of ECS - ECS Credit
and ECS Debit.
• ECS Credit (Bulk Payment) is used by an institution for affording credit to
a large number of beneficiaries (for instance, employees, investors etc.)
having accounts 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.
• 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.
• There is no value limit on the amount of individual transactions done
through ECS Debit or ECS Credit.

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.
• The Letter of Credit contains the name of the buyer, address, purchase
details, expiry date, transactional details, etc.
• They are less risky as banks conduct their own credit appraisal.

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.
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.
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.

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.
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.

NATIONAL ELECTRONIC FUND TRANSFER

(NEFT)
Ø WHAT - National Electronic Funds Transfer (NEFT) is a nation-wide
payment system facilitating one-to-one funds transfer. Under this Scheme,
individuals, firms and corporates can electronically transfer funds from any
bank branch to any individual, firm or corporate having an account with any
other bank branch in the country participating in the Scheme.
Ø WHY – No need of physical instruments for payment, no need of visiting the
branch, cost effective and near real time transfers.
Ø TELL ME MORE – There is no limit – either minimum or maximum – on
the amount of funds that could be transferred using NEFT.
o However, maximum amount per transaction is limited to ₹ 50,000/- for
cash-based remittances within India and also for remittances to Nepal
under the Indo-Nepal Remittance Facility Scheme.
o There are twenty-three half-hourly settlement batches run from 8 am to
7 pm on all working days of week (Except 2nd and 4th Saturday of the
month).
o NEFT is not available on the bank holidays, RBI holiday and Sunday.

REAL TIME GROSS SETTLEMENT (RTGS)

Ø WHAT - Under RTGS, the funds transfer takes place on a real time basis,
or in other words, at the time the request is received. It is one of the fastest
interbank money transfer facility available through banking channels in India.
 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 weekdays and from 9.00 hours to 14:00
hours on Saturdays for settlement at the RBI end. But it varies from bank to
bank.

DIFFERENCE BETWEEN RTGS AND NEFT

Ø NEFT is an electronic fund transfer system that operates on a Deferred Net
Settlement (DNS) basis which settles transactions in batches. In DNS, the
settlement takes place with all transactions received till the particular cut-off
time. These transactions are netted (payable and receivables) in NEFT
whereas in RTGS the transactions are settled individually.
Ø Timings - The RTGS service window for customer's transactions is available to
banks from 9.00 hours to 16.30 hours on weekdays and from 9.00 hours
to 14:00 hours on Saturdays for settlement at the RBI end and in case of
NEFT, currently there are twelve settlements from 8 am to 7 pm.
Ø Minimum Amount - RTGS facility is meant for large value transactions. For
retail customers, the minimum amount remitted through RTGS is Rs. 2 lakh.
There is no minimum amount for funds remitted via NEFT.
Ø Charges - NEFT charges don't exceed Rs. 25 (excluding service tax) per
transaction while for RTGS it does not exceed Rs. 55 (excluding service tax).
INTER-BANK MOBILE PAYMENT SERVICE (IMPS)
Ø WHAT - IMPS allows banks to facilitate real-time transfer and receipt of
funds for account holders through their mobile phones. The funds can be
transferred in same 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.
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