A demand draft is a negotiable instrument similar to a bill of exchange. A bank issues a demand draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain sum to the specified party (payee).
A demand draft can also be compared to a cheque. However, demand drafts are difficult to countermand. Demand drafts can only be made payable to a specified party, also known as pay to order. But, cheques can also be made payable to the bearer. Demand drafts are orders of payment by a bank to another bank, whereas cheques are orders of payment from an account holder to the bank.
Definitions and regulations :
A Demand Draft is a much safer and certain method of payment than cheques, since in the case of cheques, an individual is the drawer and hence the cheque can be dishonored by the drawee bank due to insufficiency of funds in the drawer's account. But since in the case of a DD, the drawer is a bank, payment is certain and it cannot be dishonored. This is also one of the oldest forms of remittance of funds.
Demand drafts are also known as sight drafts, as they are payable when presented by sight to the bank. Under UCC 3-104, a draft has been defined as a negotiable instrument in the form of an order. The person making the order is known as the drawer and the person specified in the order is called the drawee, as defined in the UCC 3-103. The party who creates the draft is called the maker, and the party who is ordered to pay is called the drawee
Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the act of transfer of money. From one place to another. This activity is known as "remittance business”. Banks issue Demand Drafts. For transferring the money. Bank issues Demand Drafts on various places in India. A demand draft is more secure than a normal cheque as it can only be credited to a specific payee's account, and a customer can only be reimbursed on request under indemnity if the draft is lost or stolen.
Q:What do you do when you need to transfer money to somebody else’s account?
You can either issue a cheque in the name of the party or you can get a pay order or a demand draft made in the name of the party from a bank.
Q:What are the pay order and demand draft, and how are they similar and different?
Many people think they are the same but the fact is that they are totally different instruments issued by banks. Let us take a closer look.
There are times in student life when one need to pay money to appear in an exam and the institution or college requires a small amount of money through either a pay order or a demand draft.
Q:Why do colleges require these two instruments and not the cheque issued by your dad‘?
The reason is simple. If you give a cheque, the college is not sure of the payment and may not have time to wait for the cheque to get clear as they are processing thousands of applications.
One advantage of these two instruments is that they are both prepaid in the sense that you either pay the amount up front by depositing it in the bank, or the amount is deducted from your bank account before the bank issues a payment order or a demand draft in favor of the third party for the desired amount.
Q: WWhy parties insist on a payment order or a demand draft is that they get immediate cash when they present them in a bank.
Another point of difference with the cheque is that these two do not require any signature appended at the bottom so there is no fear of them being dishonored.
If the party you wish to send money is outstation, you need to get a demand draft made in his favor.
On the other hand,
Pay orders are applicable for payment within the city and you cannot get a pay order made if the party is in any other city. Pay order is also called a banker’s check and is usually cleared in the same branch that issued it.
But this is a headache of the bank and not the party that receives it as he can deposit it in any branch of the bank in the city and also gets the money without any delay.
There is a maximum limit on pay orders and if you wish to have a pay order of higher denomination made, you need to get it made through your own account.
• Both pay orders and demand drafts are safe and secure methods of making payments to third parties.
• Pay orders are payable locally only. You cannot make payment through a pay order if the party is in any other city.
• To make payments to the third party outside the city, you need to get a demand draft made in favor of the party by paying the amount to the bank or getting it made with your account.
Demand draft is a prepaid negotiable instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment.
The demand draft is made payable at a specified branch of a bank at a specified center.
In order to obtain payment, the beneficiary has to either present the instrument directly to the branch concerned or have it collected by his bank through the clearing mechanism.
Bankers check is another payment instrument which is used by the banks to settle payment
obligations on behalf of their customers.
This instrument is guaranteed by the bank for its full value and is similar to a demand draft.
These instruments are payable at the branch of the issue and are used for payment within the local clearing jurisdiction.