Money & Banking
Voila! A demand draft is bounced!

SBI and Central Bank of India returned a DD saying that it is a "cancelled instrument". What these banks forgot is that the DD cannot be cancelled without the original instrument, which was in their possession at the time of clearing

Strange as it may sound, but two state-run lenders, State Bank of India (SBI) and Central Bank of India (CBI) had created a new record of bouncing a demand draft (DD). In this particular case, both these banks returned the DD drawn by CBI saying, “Instrument is cancelled”.
 

As we all know, a DD is much safer and certain method of payment compared with cheques. In case of cheques, an individual is the drawer and hence the cheque can be dishonoured by the drawee bank due to various reasons, like insufficient funds. However, in case of DD, the drawer is a bank and hence the payment is certain and the instrument cannot be dishonoured.
 


Central Bank of India's branch at Colaba Causeway in Mumbai, on 23 April 2013 issued a DD (no93323) for Rs21,878 on the name of Aditya Rahul Talavliker. The DD was presented in SBI's Erandwana branch at Pune by Aditya Talavliker. However, to his surprise,  Central Bank (being the local clearing branch) returned the DD saying that the “instrument is cancelled, contact branch”.
 


Interestingly, a DD can be cancelled, provided the original instrument is presented to the drawee bank. In this case, while the DD was with the banks in Pune, how can the drawee bank branch (at Colaba, Mumbai) cancel the instrument?

 

There are two possibilities. One the bank employee failed to distinguish between a cheque and a DD. And two, he may not have consulted with his/her seniors before labelling the DD as a “cancelled instrument”.

 

Moneylife has sent a mail to the SBI chairman and would post his response as and when it comes.

 

Clearance of a DD

Normally demand drafts are used to pay on demand certain amount to a specified beneficiary from one branch to another branch of same bank. However, since DDs are a kind of cheque, the basic principles of cheque clearing also apply to drafts. This means, if the payee does not have account with the same branch, he/she can deposit the DD in his bank. The bank in turn would send the DD for outward clearing (similar to cheque clearing) to the local clearing house.

 

Cancellation of DD

A DD can be cancelled at the same branch from where it was issued. The applicant needs to give a letter along with the original DD for cancellation. The bank, in turn would cancel the DD after deducting certain charges and credit the amount in the account of the applicant (if he have one with the same branch) or give him a pay order. Only the person, who has filled the application form for the original DD, can cancel it.

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COMMENTS

satish gupta

3 years ago

It is possible to cancel the DD, without presenting original at bank. In case of lost DD, an application is made for issue of duplicate dd, with due process and then it can be cancelled.

The original DD can therefore be presented for clearing and the situation explained by you can arise. Pls check with banks about this practice.

Jerry Thomas

3 years ago

Rana...google for DD cancellation procedure and you will get it...for your ready reference one such link is http://saikatd.wordpress.com/2009/12/05/...

RANA

3 years ago

Can u confirm where it is mentioned in the RBI rules that the DD can be cancelled by the applicant?

Jerry Thomas

4 years ago

In addition to the original purchaser's request, the original instrument is to be presented to the branch for cancellation, but not so in this case.

vipan mahajan

4 years ago

DD is also cancelled if the purchaser unfortunately loses /misplaces it

Ramesh Iyer

4 years ago

There have been cases in the past when unscrupulous persons have managed to get bogus DDs with the connivance of Bank staff, and this has made this instrument as reliable as a cheque. Hence, seems it is better to use new-age facilities like NEFT/RTGS which are faster and more reliable.
Of course, for the majority who do not use or have access to technology-based Banking services, there seems no alternative to cheques or DDs.

RAVINDRANATH

4 years ago

Sorry I should have mentioned Central Bank of India Colaba's version not obtained not SBI Colaba's

RAVINDRANATH

4 years ago

The DD is issued on 23.04.13 at Mumbai and made it payable at Mumbai itself. It is presented on the same day at Pune. Technically and even practically this is still possible because Mumbai-Pune can be reached in 3-4 hours' time. But if the payee was in Pune why DD was not made payable in Pune? So is something missing from the payee's story? Is it possible that the branch may have realised the mistake and issued another DD on Pune and cancelled this DD so that it is not encashed twice? What is SBI Colaba's story - which Money Life has not tried to obtain

satish gupta

4 years ago

In case the DD is lost, the bank may issue duplicate DD by first cancelling original DD and obtaining the indemnity. The original DD in this case, may have been presented after being found by the original payee.

REPLY

R Nandy

In Reply to satish gupta 4 years ago

I agree with your point.I followed the same procedure to cancel a lost draft.In addition,the issuing branch also sent a fax to the "payable at" branch not to honour the lost draft.This was in pre-CBS days.

R S Murthy

In Reply to satish gupta 4 years ago

Here the issue involved is when a DD is presented in its original form issued, whether a bank can refuse payment. The answer is a BIG NO. Under no circumustances a banker can refuse the payment of a DD. The only exception is when the bank is prevented or prohibited a Court of Law specifically.

Vaidya Dattatraya Vasudeo

4 years ago

Want to follow up the discussion.

S BHASKARA NARAYANA

4 years ago

In olden days, to cancel or issue duplicate draft, the drawer(issuing) branch used to seek the drawee (payable at) branch's non-payment confirmation, for which generally it takes months together.

But, in the present scenario of online networking of all the branches and instant reconciliation of inter office entries (like drafts etc.,) the "period of months together" narrowed down to seconds and no need of asking confirmation from other end.

jaykayess

4 years ago

As a layman, it looks to me like two mistakes on the part of CBI (and not SBI):
1. The first mistake is bouncing the DD in the first place - maybe due to some clerical error.
2. The second mistake is mentioning a wrong reason for bouncing it.

In any event, the customer should be compensated for the trouble and delay.

Chandragupta Acharya

4 years ago

The correct position under banking laws is as under:

If the purchaser of the DD states that the DD is lost and gives an Indemnity, the DD can be cancelled by the issuing branch and a duplicate issued without the physical DD being in its possession. In such a case, if the original DD is presented for clearing, the DD can be returned ONCE stating "DD reported lost, please confirm Drawee". Now, after due confirmation of the Drawee by the presenting bank, the cancelled DD can be paid and the duplicate marked as cancelled.

In the present case, the reason given for return is incorrect.

REPLY

Chandragupta Acharya

In Reply to Chandragupta Acharya 4 years ago

Correction: Payee, not Drawee!

R S Murthy

4 years ago

You are right. Demand Draft can be cancelled only on presenttion of original instrument. The usual practice in banks is when one reports loss of DD they obtain an indemnity and issue a duplicate one. The paying bank here CBI SSB Mumbai will be advised to excercise caution. When the original is presented, the paying branch will pay with a note of Caution to the collecting bank say SBI, that the DD is reported lost but paid in good faith. The collecting bank should assertain from the payee, how he got the instrument. If the account holder is genuine party in whose name the draft was issued, they can not stop him from drawing the amount. If any one opened the account just to encash the instrument, the collecting bank takes care to protect genuine payee. If they fail then we can hold them responsible. DD contains a notation ---AGAINST VALUE RECEIVED-----. When the bank had already got the value how can it refuse its payment.Such refusal to honour sends wrong signal that the bank is not in a position to pay.
Again you have sought comment of SBI MD. It is ok. You should ask CBI MD to comment on this. It is their official who refused to pay. SBI will only give general opinion but not explanation.

R S Murthy

4 years ago

You are right. Demand Draft can be cancelled only on presenttion of original instrument. The usual practice in banks is when one reports loss of DD they obtain an indemnity and issue a duplicate one. The paying bank here CBI SSB Mumbai will be advised to excercise caution. When the original is presented, the paying branch will pay with a note of Caution to the collecting bank say SBI, that the DD is reported lost but paid in good faith. The collecting bank should assertain from the payee, how he got the instrument. If the account holder is genuine party in whose name the draft was issued, they can not stop him from drawing the amount. If any one opened the account just to encash the instrument, the collecting bank takes care to protect genuine payee. If they fail then we can hold them responsible. DD contains a notation ---AGAINST VALUE RECEIVED-----. When the bank had already got the value how can it refuse its payment.Such refusal to honour sends wrong signal that the bank is not in a position to pay.
Again you have sought comment of SBI MD. It is ok. You should ask CBI MD to comment on this. It is their official who refused to pay. SBI will only give general opinion but not explanation.

Ex-power industry loan growth slows to 10.2%
  • Credit growth for the banking sector as on 17 May 2013 stands at 14.7% y-o-y and deposit growth stands at 13.5% y-o-y, says Nomura Equity Research in its Quick Note


    As of April 2013, aggregate non-food credit growth was 13.8% y-o-y with primary contributions from industry ex SME (14.5% y-o-y), SME (17.9% y-o-y) and retail (14.8% y-o-y). Loan growth for the industry sector ex power was 10.2% y-o-y. As per the RBI's weekly statistical supplement, non-food credit as of 17 May 2013 was 14.7% y-o-y.

 

  • Within retail, mortgages (15.1% y-o-y), credit cards (20.1%) and vehicle loans (26.6%) were the key growth areas.

 

  • In the industry segment, loans to micro & small corporates grew at 22.9%, loans to medium corporates were flat at 0.9% and large corporate loans grew by 15.6% (all y-o-y).

 

  • Key growth drivers within the industry segment have been power (32.3% y-o-y), iron & steel (22.5% y-o-y), chemicals (22.7% y-o-y), food processing (33% y-o-y) and roads (21.2% y-o-y). Telecom loans continue to decline (-4.6%) y-o-y.

 

  • In the services segment, the big growth areas are: wholesale trade 21.2% and retail trade 25.7%. Loans to NBFCs were weak at 5.2% y-o-y, compared with 14.7% at the end of March 2013. Loans to transport operators continue to be weak at 3.9% y-o-y.

 

Credit growth for the banking sector as on 17 May 2013 stands at 14.7% y-o-y and deposit growth stands at 13.5% y-o-y. LDR for the banking sector remains high at 77.5% (74.3% as of May 2012).

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May 2013 auto sales: Cars and MHCVs disappoint; tractors strong

Strong growth in tractor volumes are driven by improved customer sentiment on expectations of a good monsoon this year and improved Rabi crop realizations, says Nomura Equity Research in its Quick Note on the automobile industry

Most of the auto companies have reported May 2013 sales volumes. Overall, volumes were below expectations for cars and MHCVs, while tractor volumes surprised positively. “Mahindra & Mahindra’s (M&M) volumes were up by 24% y-o-y as compared to our estimate of 8% growth. As well, tractor volumes for Escorts were strong and increased by 18% y-o-y. We believe that strong growth in tractor volumes are driven by improved customer sentiment on expectations of a good monsoon this year and improved Rabi crop realizations,” said Nomura Equity Research in its Quick Note on the industry. The brokerage prefers to watch for volume growth over the next 1-2 months to see if FY14F could see a strong turnaround in the sector.

 

As per Nomura’s calculations, domestic volumes for the car industry fell by 12% y-o-y as against its estimate of a 7% decline. Maruti Suzuki’s (MSIL) domestic volumes fell by 13% while Nomura was expecting a 4% decline. As per its discussions with the management MSIL’s retail volumes were flat y-o-y in May 2013 and wholesale volumes were impacted by inventory reductions to some extent. “MSIL is confident of achieving its full-year volume growth target of 6% (versus our estimate of 6.5% growth),” said Nomura.

 

Amongst unlisted companies, Toyota and Ford have seen 30%+ declines. Honda’s volumes were up 10% led by the launch of Amaze. GM volumes increased by 40% y-o-y led by launch of new MPV Enjoy and continued good customer response for its Sail sedan, according to Nomura.

 

Nomura estimates that volumes in the MHCV industry declined by around 17% y-o-y as compared to its estimate of 9% decline. Both Tata Motors’ (TTMT) and Ashok Leyland’s (AL) volumes were weaker than the brokerage’s expectations. TTMT reported a 19% fall in volumes while AL’s volumes were down 22% y-o-y. Eicher’s total CV volumes increased by 2% y-o-y.

 

Domestic two-wheeler industry volumes were up 2% y-o-y in May-13, which was in line with Nomura’s estimates. Hero MotoCorp’s (HMCL) volumes were flat y-o-y; above the brokerage’s forecast of 5% decline. Honda Motorcycle & Scooter’s (HMSI) volumes were up only 3% y-o-y at around 230,000 units (around 260,000 units in April 2013); bike volumes fell by 4% y-o-y. Bajaj Auto’s domestic bike volumes increased by 3%, while TVS’ volumes were down 8% y-o-y.
 


Nomura adds that production from HMSI’s new plant (1.2mn annual capacity) will begin from June 2013; thus, volumes over the next 2-3 months will be critical as incumbents (HMCL and Bajaj Auto) might face further market share pressures.

 

Strong improvement in tractor volumes is quite positive for M&M, says Nomura. If the current trend continues we can see strong double-digit growth in FY14F. The brokerage is currently looking at 8% volume growth for tractors in FY14F. In terms of sensitivity, 5% higher tractor volumes can increase its core EPS estimates (M&M + MVML) by around 3%. For M&M, volume growth in passenger vehicles was 5% in May 2013 and LCV volumes were up 12% which is marginally ahead of Nomura’s estimates. Further, strong growth in Ssangyong volumes (up 25% in May) also augurs well for M&M, says Nomura.

 

For Maruti, Nomura expects earnings growth to remain strong over the next two years driven by margin improvement and recovery in car industry volumes in FY15F. Therefore, any decline in stock price should be used as a buying opportunity, opines Nomura.


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