JAIIB PPB: demand draft issuance and cancellation rules explained

For a JAIIB aspirant, demand draft issuance and cancellation looks like a counter-level routine until the examiner asks who is entitled to cancel a draft, what happens when one is lost, and which RBI ceilings apply to a cash purchase. A demand draft is the bank's own promise to pay, not the customer's, so the rules governing it are far stricter than those for an ordinary cheque. This guide walks through the issue process, RBI's disclosure and validity norms, refund and revalidation mechanics, duplicate drafts, and the legal position of the paying branch.

💳 What a Demand Draft Actually Is

A demand draft is an order in writing, drawn by one office of a bank on another office of the same bank (or on itself), directing payment of a certain sum to a named payee or order on demand. In form it is a bill of exchange, because the drawer and the drawee are both the bank; the purchaser is not a party to the instrument at all once it has been issued.

That single structural fact drives almost every rule you will be tested on. The purchaser has already parted with the money, so the bank cannot dishonour the draft for want of funds. The payee holds a claim directly against the bank, which is why a draft is demanded for tender deposits, examination fees, college admissions, court deposits and property transactions where the beneficiary will not accept the credit risk of a personal cheque.

Two statutory points recur in question papers. First, Section 85A of the Negotiable Instruments Act gives the paying bank a discharge where a draft payable to order is paid in due course — an idea explored further in our note on protection to paying and collecting banker. Second, Section 31 of the Reserve Bank of India Act bars anyone other than the RBI and the Central Government from issuing a bearer instrument payable on demand, so a draft can never be made payable to bearer. It is always payable to order, and it is normally crossed. The counter conduct expected while selling one is set out in the CUSTOMER SERVICE GUIDELINES chapter.

🧾 RBI Rules Governing Issue at the Counter

Issue is governed by a small cluster of RBI instructions that candidates are expected to know by value. Banks must incorporate the name of the purchaser on the face of every demand draft, pay order or banker's cheque of ₹20,000 and above. The purpose is audit-trail traceability, so that an instrument surfacing in a suspicious transaction can be traced back to whoever funded it.

Separately, banks must not issue drafts, mail transfers or telegraphic transfers of ₹50,000 and above against cash. Such instruments must be issued by debit to the purchaser's account or against a cheque or other instrument, which converts every large draft sale into a traceable, KYC-anchored transaction. Cash tendered at or above that threshold also triggers PAN or Form 60 collection and identification of the walk-in customer, the practice covered in operational aspects kyc.

The third number is validity. Since 1 April 2012, cheques, drafts, pay orders and banker's cheques are valid for three months from the date of issue, reduced from the earlier six months to curb misuse of stale instruments. Beyond that, the instrument must be revalidated or refunded; a drawee branch that pays a stale draft acts outside its mandate.

Commission is recovered on issue, with GST, and a higher rate is commonly charged where the draft is bought for cash rather than by debit to an account. Drafts are printed to CTS-2010 standards, and the issuing branch advises the drawee branch so that payment can be reconciled.

💡 Exam Tip: Keep the two thresholds separate — ₹20,000 and above means the purchaser's name must appear on the instrument; ₹50,000 and above means it cannot be sold against cash at all.

🔄 Cancellation, Refund and Revalidation Mechanics

Cancellation is where most candidates lose marks, because the intuitive answer is wrong. The right to seek cancellation vests in the purchaser, not the payee, and only on surrender of the original instrument together with a written request. The branch verifies the purchaser's signature against the application, confirms identity, marks the draft cancelled, advises the drawee branch to stop paying it, and refunds the proceeds after deducting cancellation charges.

The refund is credited to the purchaser's account rather than paid across the counter in cash, preserving the audit trail. Where the purchaser holds no account, the branch applies the same identification discipline used at issue.

The critical qualification is delivery. Once the draft has been handed to the payee, the payee acquires a claim against the bank, and the purchaser can no longer unilaterally undo it. In practice the branch will insist on the original instrument coming back, which is precisely the proof that the payee has not acted on it. A purchaser who has already parted with the draft and wants it stopped must obtain the payee's consent or a court order.

Revalidation applies to a draft that has crossed the three-month window but is otherwise intact. The issuing branch may revalidate it on written request, recording the revalidation on the instrument, or may instead cancel and issue a fresh draft. Drafts that are never presented and never claimed eventually follow the same route as other untouched credits — see our explainer on unclaimed deposits and DEA Fund.

⚠️ Common Mistake: Treating a draft like a cheque and assuming the purchaser can simply "stop payment". A draft is the bank's own undertaking; there is no countermand right in the purchaser once it has been delivered.

🕵️ Lost Drafts, Duplicates and Fraud Controls

When a draft is lost, the customer cannot demand instant re-issue, but neither can the bank sit on the request. RBI's customer service instructions require banks to issue a duplicate demand draft within a fortnight of receiving the request, and where that timeline is breached, to compensate the customer with interest at the rate applicable to a fixed deposit of corresponding maturity for the period of delay.

The usual safeguards apply before the duplicate is released. The purchaser executes an indemnity bond, the drawee branch confirms that the original remains unpaid, and a caution is marked in the records so the original cannot be paid if it later surfaces. For lost drafts of small value — up to and including ₹5,000 — a duplicate may be issued to the purchaser on the basis of adequate indemnity alone, without insisting on a non-payment advice from the drawee office, which spares the customer a long wait for a trivial sum.

Fraud control matters here because drafts are a favoured instrument in tender and job scams. Forged drafts, altered payee names and altered amounts are all seen in practice, so beneficiaries of high-value drafts are advised to confirm genuineness with the issuing branch rather than relying on the paper alone. Alteration of a material particular destroys the instrument unless authenticated by the drawer bank itself. The control environment expected around instruments and systems is discussed in the SECURITY CONSIDERATIONS chapter.

📌 Remember: Duplicate within a fortnight, or the bank pays interest at the corresponding fixed-deposit rate for the delay — a favourite one-line question.

⚖️ Legal Position and How a Draft Compares

Because the bank is both drawer and drawee, a draft cannot be dishonoured for insufficiency of funds, and the paying branch is protected under Section 85A when it pays a draft payable to order in due course. A third party who wants payment blocked has to move a court; the bank will also withhold payment where the account is subject to a judicial or statutory freeze, a subject covered in our piece on the garnishee order and attachment order.

Candidates should also be able to distinguish a demand draft from its close cousins. A banker's cheque or pay order is issued by a branch on itself and is payable locally, whereas a draft is drawn on another office and is payable at the drawee centre. Both are bank obligations; a customer's own cheque is not. The current text of these instructions is available in the Reserve Bank's official circulars and master directions.

🧠 Practice MCQs: Demand Draft Issuance and Cancellation

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❓ Frequently Asked Questions

Take this into the exam with confidence

Fix the numbers first — ₹20,000, ₹50,000, three months, a fortnight, ₹5,000 — then reason from the principle that a draft is the bank's own liability, and most questions on demand drafts answer themselves. Revise alongside the rest of the paper through our Principles and Practices of Banking blog hub, and balance your preparation with theory papers such as national income accounting in India. Structured chapter notes, videos and tests are available in the JAIIB course.