In the wake of growing use of digital payment systems like NEFT and RTGS, does the use of Demand Drafts still make sense?
Demand drafts need no introduction today. In fact, they are as familiar in India as cheques and are usually preferred over cheques also as their payment can’t be denied as in the case of a cheque due to insufficient funds. However, in the wake of growing use of digital payment systems like NEFT and RTGS, does the use of DDs still make sense? Also, when should they be used?
Sample this: Delhi-based Neeraj Verma booked a home in Noida recently, but while making payment to the builder he got caught in a dilemma. Since the amount was large (Rs 10 lakh), the builder refused to accept cash, and insisted on making the payment either through a Demand Draft or any digital mode. The builder was not willing to accept cheques also as some of the cheques he had received from some other customers earlier had got bounced. However, making payment through a digital mode like NEFT, RTGS or by a physical instrument like DD was certainly going to entail some transaction cost and Verma was not ok with that as that was an additional expense for him. However, since there was not any other option, Verma asked one of his friends – Raghu Ram – what to do and which one would cost him the least.
Verma had thought it would be DD, but Raghu’s answer surprised him. However, before knowing what Raghu said, here we are taking a look at some of these payment options and the transaction costs involved:
Demand Draft: DD is a prepaid instrument drawn on in the name of the bank by an individual who wishes to make a transfer payment from one bank account to another. “DD is a preferred mode over the cheques as its payment can’t be denied as in case of cheques due to insufficient funds. Demand draft charges are not constant and vary from bank to bank and also according to the value of the draft. India’s leading banks usually levy charges varying from Rs 30 to Rs 50 on each draft up to the amount of Rs 10,000. In case of HDFC Bank and ICICI Bank, for instance it’s Rs 50 per draft, while for PNB it’s Rs 35 per draft,” says CA Amit Mittal, Founder & Chief Consultant Officer of eSilverbucks Consultants Pvt Ltd. However, the charges go up with the increase in amount.
DD Charges of Some of Prominent Banks
Financial experts say that there are no hidden charges in case of DDs, unlike other transaction modes. And the fee is quite reasonable to avail immediate services. However, when getting a DD made, ensure that each and every detail filled up in the draft, from the date of issuing to the amount, is accurate and true to your knowledge. “Check these details precisely before getting the final DD made because even the cancellation of a DD has become costlier nowadays. Also, nowadays, even the demand drafts are getting forged. So, for all the ones accepting the demand drafts as payment modes, it’s necessary to take some precautionary measures like visually checking and verifying all the contents, immediately calling the issuing branch and verifying the DD. Always remember that precaution is better than regret,” informs Mittal.
NEFT: NEFT stands for National Electronic Funds Transfer. It is a nation-wide payment system facilitating one-to-one funds transfer. Individuals, firms and corporates maintaining accounts with a bank branch can transfer funds using NEFT. Individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. There is also no limit on the minimum or maximum amount of funds that could be transferred using NEFT, except in some cases. NEFT charges also vary from bank to bank. ICICI Bank, for instance, levies charges ranging from Rs 2.5 to Rs 25 on NEFT transactions up to Rs 10 lakh, while some banks like HDFC Bank have made online transactions through RTGS and NEFT free of cost from November 1 this year. However, if done through bank branches, then you will have to pay from Rs 2.50 to Rs 25 for NEFT transactions.
RTGS: RTGS stands for Real Time Gross Settlement, which can be defined as the real-time settlement of fund transfers individually. The RTGS system is primarily meant for large value transactions as the minimum amount to be remitted through RTGS is Rs 2 lakh, while there is no upper ceiling for RTGS transactions. Under normal circumstances, the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. For RTGS, ICICI Bank charges Rs 25 an amounts above Rs 2 lakh and up to Rs 5 lakh, and Rs 50 on amounts above Rs 5 lakh and up to Rs 10 lakh. HDFC also charges the same amount for branch transactions, while online transactions are free.
Which one to use?
It is clear, thus, that the charges of both NEFT and RTGS are negligible when compared to the DD charges, particularly in case of high-value transactions. For instance, while Verma will have to pay around Rs 3,000 for a DD of Rs 10 lakh, he will have to pay only Rs 25 and Rs 50 for a Rs 10-lakh NEFT or RTGS transaction, respectively. And in some cases, he can also do it for free. Raghu, therefore, advised Verma to go for either NEFT or RTGS instead of using a DD for payment.
Experts say that even in case of low-value transactions, paying through NEFT makes more sense. For instance, you will have to pay only Rs 2.50 for amounts up to Rs 10,000 and Rs 5 for amounts above Rs 10,000 and up to Rs 1 lakh in case of NEFT, while in case of a DD, the charges will be Rs 50 for amounts up to Rs 10,000 and Rs 300 for Rs 1 lakh.
“Unlike earlier when DDs were the only ‘instant’ non-cash transaction, today there are different ways – NEFT, IMPS, RTGS, and UPI to name a few – that enable fund transfers in real time. Compared to DDs, they cost a fraction in terms of charges. They are also instant and traceable, which make them a good alternative for DDs. Most important, these do away with the need to physically apply and collect a DD within a specific window from a specific location, saving time and effort,” says Adhil Shetty, CEO, BankBazaar.com.
True, there are occasions when we need to make payments with DDs, like while applying for some jobs and professional courses, but we should try to avoid their use wherever possible, particularly in view of better payment options like NEFT and RTGS available these days.