This article throws light upon the top five instruments used for making and receiving payments. The instruments are: 1. Cheques 2. Demand Draft 3. Banker Cheque 4. Pay Orders/Payment Orders 5. Transfer Pay Orders.

Instrument # 1. Cheques:

A cheque is a bill of exchange payable on demand and is drawn on a banker. A cheque is not cash, as it does not assume the finality of payment. The funds may not be available with the drawer or the drawer may have withdrawn funds from his bank account in the interim leading to the possibility of cheque being dishonored on presentation.

In addition the banks levy a collection charge based on the value of the cheque as well as postal charges in case of outstation cheques. It also takes some time to realize the proceeds of outstation cheques. For these reasons, the cheque is not always acceptable in several business transactions particularly where the drawer and the payee are not known to each other.

In many commercial transactions, the seller of goods and services prefer to have a payment instrument where the sum of money payable to the payee is guaranteed. The Demand Draft is one such instrument.

Instrument # 2. Demand Draft:


A Demand Draft is a pre-paid negotiable instrument, wherein the drawee bank undertakes to make payment in full when the payee for payment presents the instrument. The Demand Draft is made payable on a specific branch of a bank at a specified center.

In order to obtain payment, the beneficiary has either to present the instrument directly to the branch concerned or have it collected through clearing mechanism. However a draft does not satisfy the definition of a bill of exchange because it is not “drawn by one person on another”.

Instrument # 3. Banker Cheque:

A Banker Cheque is another payment instrument, which is used by Banks to settle payment obligations on behalf of their customers. The instrument is granted by the Bank for its full value and is similar to a Demand Draft. In practice these instruments are payable at the branch of issue and are used for payment within the local clearing jurisdiction.

Instrument # 4. Pay Orders/Payment Orders:

Banks for payments made on behalf of the bank issue payment orders. These instruments are signed by a Banker and carry the guarantee of the bank for the availability of the funds. These instruments are also payable on the branch of issue.

Instrument # 5. Transfer Pay Orders:


These instruments do not fall in the category of cheques, drafts, payment orders etc. These instruments are part of internal functioning of banks and are not handed over to customers. These are used by bank to carry out the instructions of its customer to transfer funds from their bank accounts to some other account in some other branch of the same bank.

The instruments are sent by the concerned branch to other branch for crediting the proceeds as per instruction of the customer. Now with the introduction of Centralised Banking System and Internet banking it has become very easy for the customers to get their funds transferred immediately in case the transfer relates to the different branches whether local or outstation of the same bank.

Transfer Pay order system has become outdated and has now be stopped by all Banks. In case of transfer of funds from one Bank to another Bank whether local or outstation the services of NEFT for transfer of funds up to Rs. One Lac and in case of transfer of funds above One Lac the services of RTGS system can be availed. Both these system provide transfer credits same day.

Keeping in view the need for establishing a robust payment and settlement system of India. The Reserve Bank of India makes a review of this system from time to time. With the result RBI has contributed a lot in erecting infrastructure for making payment systems more fast and quick to keep pace with the rapidly changings.

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