Cheques, Drafts, and Standing Instructions: Banking Payment Modes

Money moves between people and businesses every single day, and not all of it travels as physical cash. When you pay your college fees, settle a vendor’s bill, or send money to a family member in another city, you are often relying on instruments that the banking system has refined over more than a century. Cheques, bank drafts, and standing instructions are three of the most important tools a bank account holder can use to make payments safely and conveniently. Understanding how each one works, and where the legal protections lie, helps you avoid costly mistakes like a dishonoured payment or a draft that cannot be cancelled.

The cheque: the most familiar payment instrument 🔗

A cheque is the everyday face of bank-based payments. Legally, it is far more precise than it looks. Under Section 6 of the Negotiable Instruments Act, 1881, a cheque is a bill of exchange drawn on a specified banker and payable only on demand. The modern definition also covers the electronic image of a truncated cheque and a cheque in electronic form, which reflects how banks now clear cheques digitally rather than by physically moving paper.

Every cheque involves three parties, and knowing who they are makes the rest of the topic easier to follow.

• Drawer: The account holder who writes and signs the cheque, instructing the bank to pay.
• Drawee: The bank on which the cheque is drawn and which is directed to make the payment.
• Payee: The person to whom the amount stated on the cheque is to be paid.

The Act itself describes the maker of a cheque as the drawer and the person directed to pay as the drawee. There is also a useful special case: a cheque can be made payable to “self.” When that happens, the drawer and the payee are the same person, which is exactly what you do when you withdraw cash from your own account using a cheque.

Bearer cheque versus order cheque 🔗

Not all cheques transfer the same way, and this difference matters for security. A bearer cheque is payable to whoever presents it at the bank counter. It behaves almost like cash because it can be passed from one person to another by simple delivery, without any signature on the back. This makes it convenient but risky: if a bearer cheque is lost or stolen, whoever holds it can usually collect the money.

An order cheque is payable to a specific named person or to that person’s order. To transfer it to someone else, the payee must endorse it by signing on the reverse. Because the payee must be named and endorsement is required for transfer, an order cheque is harder to misuse than a bearer cheque. This is one of the reasons banks and businesses generally prefer order cheques for anything beyond small, routine payments.

Stale cheques and post-dated cheques 🔗

A cheque does not stay valid forever. It must be presented within a limited window, after which the bank will refuse to honour it. The original Negotiable Instruments Act allowed a longer period, but the Reserve Bank of India directed that from 1 April 2012, banks should not pay cheques, drafts, pay orders or banker’s cheques presented beyond three months from the date of the instrument. A cheque presented after this period becomes a stale cheque, and the bank is obliged to dishonour it. If you are holding a cheque, the practical lesson is simple: deposit it well within three months, or ask the issuer for a fresh one.

A post-dated cheque works in the opposite direction in time. It carries a future date, which means it is valid and negotiable but cannot be paid until that date arrives. Banks will not honour a post-dated cheque before its due date. These are commonly used for rent, equated monthly instalments, and advance payments, where the payer wants to commit to a payment but only allow it to be encashed on a particular day.

Crossing of cheques: building in safety 🔗

Crossing is one of the simplest yet most powerful safety features available on a cheque. To cross a cheque, you draw two parallel transverse lines across its face, sometimes with words like “And Company” written between them. The effect is significant. A crossed cheque cannot be paid in cash over the counter; it must be deposited into a bank account. This stops a thief from simply walking into a branch and collecting cash on a stolen cheque.

The law recognises more than one kind of crossing. Under Section 123, a general crossing exists when a cheque bears two parallel transverse lines, with or without the words “and company”, and the bank may then pay it only to another banker rather than across the counter. A special crossing goes further by writing the name of a particular bank between the lines, so payment can be routed only through that named bank. There is also the widely used “account payee” crossing, where the words “A/c Payee” are added, directing that the proceeds be credited only to the account of the named payee. Each layer of crossing narrows down who can ultimately receive the money, which is why crossing is treated as the safest way to make a cheque payment.

Bank drafts: a payment the bank guarantees 🔗

While a cheque depends on the drawer having enough money in their account, a bank draft removes that uncertainty. A draft is paid for in advance, so the recipient knows the funds are already with the bank. This makes it a preferred instrument for large or important payments, such as admission fees, property transactions, or dealings between parties who do not know each other well.

The legal backbone here is Section 85A of the Negotiable Instruments Act, which describes a draft as an order to pay money drawn by one office of a bank upon another office of the same bank, for a sum payable to order on demand. This section was inserted to protect bankers against forged or unauthorised endorsements on such drafts. Like a cheque, a draft has three parties, though they are arranged a little differently.

• Issuing branch: The branch of the bank that draws the draft, acting as the drawer.
• Paying branch: Another office of the same bank on which the draft is drawn, acting as the drawee.
• Payee: The person named in the draft who is entitled to receive the money.

One important point often missed by beginners: the purchaser of the draft is not a party to the instrument. The person who walks into the bank and pays for the draft is simply the buyer. The instrument itself is an arrangement between the bank’s two offices and the payee.

Why you usually cannot stop payment on a draft 🔗

A bank draft is the bank’s own commitment to pay, which gives it a status close to that of a promissory note. This is precisely why it is so trusted, and also why it is hard to reverse. As legal commentary on banking practice explains, the issuing branch normally cannot countermand payment of a draft because, by issuing it, the bank takes on a commitment in favour of the payee.

The timing of delivery is what decides the matter. Once the draft has been delivered to the payee, the payee acquires a right in the instrument, and the purchaser can no longer ask the bank to stop payment. However, if the purchaser changes their mind before the draft has been handed over to the payee, they can approach the bank to cancel it and recover the money. The takeaway is to be certain before you part with a draft, because the window to undo the transaction closes the moment it reaches the recipient.

Standing instructions: automating routine payments 🔗

Some payments repeat on a predictable schedule, and writing a fresh cheque each time would be tedious. Standing instructions solve this. A standing instruction is an authorisation you give your bank to make specified payments on your behalf, automatically, when they fall due. Once you set it up and the bank accepts it, the bank takes responsibility for carrying it out carefully and on time.

Standing instructions cover a wide range of recurring transactions. Common examples include paying insurance premiums to LIC, settling club subscriptions, making regular fund transfers, collecting pension, collecting interest on government securities, and collecting dividends. The arrangement is convenient, but it does come with one clear responsibility for you as the customer: you must keep sufficient funds in your account on the due date. The bank pays a standing instruction only when the payment is due and only if the money is available. If the balance is short, the instruction can fail, which may attract charges or, in the case of something like an insurance premium, risk a lapse in cover.

The Reserve Bank of India treats reliable execution of customer instructions as part of fair banking conduct, and its broader guidelines on customer service in banks set the tone for how banks are expected to handle such commitments promptly. In practice, this means once you have given a valid standing instruction and maintained funds, the bank is expected to execute it without you having to follow up each month.

Choosing the right mode of payment 🔗

Each of these instruments fits a different need. A cheque is flexible and convenient for ordinary payments, and crossing it adds a strong layer of safety. A bank draft suits high-value or trust-sensitive payments because the bank guarantees the funds, but its near-irreversible nature demands care before delivery. Standing instructions are ideal for predictable, recurring payments where automation saves time, provided you keep your account funded. Knowing which instrument matches the situation is a genuinely useful financial skill, and the legal framework behind each one exists to protect both the payer and the payee.

What do you think? If you had to make a large, one-time payment to someone you had never dealt with before, would you choose a crossed cheque or a bank draft, and what would influence your decision? And in an age of UPI and instant transfers, do you think traditional instruments like cheques and drafts still have a meaningful role to play?

References

1. https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act,_1881.pdf
2. https://indiankanoon.org/doc/1132672/
3. https://www.business-standard.com/amp/article/finance/rbi-directs-co-op-banks-not-to-process-3-mth-old-cheques-111112300132_1.html
4. http://bdlaws.minlaw.gov.bd/act-46/chapter-details-147.html
5. https://lawpage.in/negotiable-instruments/note/section-85a
6. https://bankingallinfo.com/bank-draft-comprehensive-overview/
7. https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=10472