Introduction to Demand Draft (DD)
A Demand Draft (DD) is a secure banking instrument that can be drawn from one bank account to another. Unlike cheques, the drawer's signature is not required to encash the draft. Banks can only issue demand drafts and are less prone to fraud, making the transaction much safer.
Demand drafts are generally used in situations involving large sums of money or when transactions occur between parties who do not know each other, where there is a lack of trust. Since DDs are issued only after verifying the drawer's account balance, the risk of payment default is eliminated.
How a Demand Draft Works
- Drawer: The individual or entity requesting the demand draft from the bank.
- Drawee: The bank is responsible for paying the payee the amount mentioned on the demand draft.
- Payee: The individual or entity in whose name the demand draft is issued and who will receive the payment.
The bank deducts the required amount from the drawer’s account and issues the DD in favour of the payee. The payee can deposit the demand draft into their bank account, ensuring secure and reliable payment.
Types of Demand Drafts
- Sight Demand Draft: A sight demand draft is payable only upon the presentation of specific documents by the payee. The bank will not release the payment if the necessary documents are not provided.
- Time Demand Draft: A time demand draft is payable only after a specified period. The payee cannot claim the amount before the maturity date set by the drawer and the bank.
Advantages of Demand Drafts
- Guaranteed Payment
Since demand drafts are issued only after verifying the drawer’s account balance, the risk of payment default is eliminated. - Low Risk of Fraud
Demand drafts are safer than cheques, as unauthorised individuals cannot encash them and cannot bounce due to insufficient funds. - Secure Transactions
Demand drafts are best used for high-value transactions or business transactions with unfamiliar parties, as they are reliable and trustworthy. - Widely Accepted
All banks across the country accept demand drafts, which are safe and convenient if large amounts are to be paid.
Disadvantages of Demand Drafts
- Issuance Charges
Banks charge a fee for issuing demand drafts, which may increase with the amount of the draft. - Inconvenience in Issuance
Unlike cheques, which an account holder can issue immediately, demand drafts are issued only through a formal process after visiting the bank branch. - Non-transferability
Demand drafts can only be encashed by the payee whose name is mentioned, thus reducing flexibility compared to cheques.
Key Takeaways
- Digital Alternatives
Demand drafts have declined as online payment systems such as NEFT, RTGS, and UPI are in use. However, people still prefer safe, high-value transactions to pay the government or institutions. - Bank Charges for DD Issuance
Banks have recently revised the charges for issuing demand drafts, with some offering concessions to senior citizens and students.
