Dimand Draft

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mand draftTechnical Report 2010

A note on demand draft charges
levied by banks in India

Ashish Das, Rajeev Kumar and Prasanna Kumar
Department of Mathematics
Indian Institute of Technology Bombay
Mumbai-400076, India

Indian Institute of Technology Bombay
Powai, Mumbai-400 076, India

A note on demand draft charges levied by banks in India
Ashish Das1, Rajeev Kumar2 and Prasanna Kumar3
Department of Mathematics
Indian Institute of Technology Bombay
Mumbai-400076, India
March 18, 2010

Abstract
In this paper we study the service charges levied by banks on demand drafts in India. Though RBI advocated reasonability of service charges for demand drafts as early as February 2007, it did not prescribe any explicit thresholds or measures of reasonability. We try to propose a rationalization of such charges by looking into the demand draft charges of 37 select banks comprising 89% of the network of bank branches in India. It is observed that among the select banks the highest service charge for issue of demand draft (having value upto Rs. 10,000) is Rs. 550 while the same is Rs. 1000 for cancellation. Similarly, for issue of demand drafts, having value more than Rs. 10,000, such charges range from 0% to 0.45% of the draft amount. After more than 36 months of RBI’s advice to banks on reasonability of service charges for demand draft issue, we find that more than 10% of the banks have not prescribed a ceiling for demand draft charges. Also, among those who have set a cap, the maximum demand draft charge has been set as high as Rs. 30,000. The analysis carried out here has an underlying premise that competitive market pricing is required to safeguard consumer interest, and if market fails to have a pricing structure which is competitive, it becomes imperative to take recourse to public policy to protect consumer interest. Focusing at the reasonability of service charges levied by banks for issuing demand drafts, the study provides benchmarks and concludes that there is a need to rationalize and bring in uniformity in the amount of service charges for demand drafts.

1

Dr. Ashish Das is Professor with the Indian Institute of Technology Bombay . E-mail: ashish@math.iitb.ac.in Mr. Rajeev Kumar is a student at the Indian Institute of Technology Bombay. E-mail: rajeev@math.iitb.ac.in 3

Mr. Prasanna Kumar is a student at the Indian Institute of Technology Bombay. E-mail: prasanna@math.iitb.ac.in 2

1. Introduction
The Reserve Bank of India (RBI) has set a vision to establish safe, secure, sound and efficient payment and settlement systems in the country. Existence of an efficient payment system is a pre-requisite to boost economic activity in the country. Towards this endeavour, over the years RBI has taken several measures to bring about changes in the service delivery levels, including the cost of services. With a vision to foster competition and to provide better services to customers, RBI, in November 2004, had liberalised the process of cheque collections and advised banks to frame their own cheque collection policies and give wide publicity to the same. Banks were permitted to have their own policy on service charges for such cheque based payment system. It was expected that through such a deregulation, the paper based payment system would achieve improved standards, enhanced efficiency as well as bring down costs. Subsequently, in consonance with the Payment and Settlement Systems Act, 20074, in order to set standards, RBI recently issued directions benchmarking the outstation cheque collection ’s time frame and charges (see, references [7] and [3]). Thus RBI aimed to ensure that charges are reasonable and are decided by market forces and competition. However, RBI did not set standards on demand draft charges and left it to the banks’ board to decide on the same. Earlier, a Working Group to formulate a scheme for ensuring reasonableness of bank charges was set up by RBI that submitted its report in...
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