Today some of the banking instruments used for ensuring payments from customers are Letters of Credit, Bank Guarantees and sending documents through bank. Letters of credit guarantee payment if all the conditions listed in the LC are fulfilled. Bank guarantees are generally not intended to be invoked and are only used as security to be returned when the transaction is completed. Sending documents of title such as Lorry Receipts and Railway Receipts thought bank to be released to the buyer only after receiving payment is also used but there is no credit involved.

Post dated drafts would help in improving collections by reducing the paper work involved in LCs and Bank guarantees and allow for credit to be given even when documents are sent through bank.

The seller can despatch goods to the buyer and intimate him. The buyer can go to his banker on receipt of the intimation or on receipt of the goods and take a post dated draft, post dated for the agreed credit period, of say 30 days or 60 days, and post / courier it to the seller. The seller would be able to discount the draft with his banker. This should pose no problem since the payment on the due date is guaranteed by the bank issuing the draft . The draft issuing bank would debit the buyer's account after the draft is received through the regular banking channels.

Even when documents are sent through bank the bank can issue a post dated draft instead of a current dated draft as at present.

It would perhaps be difficult to replace foreign LCs with this system but inland LCs can certainly be replaced with this system.
 

Part payment of cheques:

At present the practice is that a cheque cannot be part paid, it has either to be paid in full or dishonored. Thus is a cheque for Rs 1000 is issued and the balance in the account is Rs 900 the cheque is dishonored. This was acceptable when banking was not automated and it would have been a Herculean task to keep track of part payments of cheques and keep making the part payment till it is satisfied in full. But now that banks and clearing houses are fully automated it is certainly possible to make part payments of cheques rather than dishonor the cheque even if there is a small short fall in the balance. Initially this can be permitted only for current accounts which are mainly used for Business to business payments.

Safeguards would of course have to be thought of and incorporated into the scheme.

1. Both the drawer and the payee would have to undertake to accept part payment by making suitable endorsement on the cheque such as "Part payment accepted".
2. Part payment could be permitted only if the short fall in funds is less than say 25% of the value of the cheque.
3. The validity of the cheque can be reduced from 6 from the date of issue to say 1 month from the date of presentation or 6 months from the date of issue which ever is less. Thus the cheque would not have to be retained by the drawee bank for a long period. If the cheque cannot be paid in full in this one month period the unpaid portion would be treated as a dishonored / bounced cheque.
4. The facility can be extended only for cheques whose value is less than say one month's average credits in the account during the past 12 months. This would ensure that cheques for large amounts which stand no chance of being honored even if they are retained for 1 month are not retained but are dishonored straightaway.