Cheque and Draft Differences

A cheque and a demand draft are two common financial instruments used in the banking system for transferring money. Both serve as means of payment but differ in their nature, mode of issue, and degree of security. Understanding their distinctions is important for banking operations, commerce, and examinations in business and finance studies.

Definition and Basic Concept

A cheque is a negotiable instrument drawn by an account holder (drawer) on a specific bank, instructing it to pay a certain sum of money to the person named (payee) or to the bearer of the cheque. It is defined under Section 6 of the Negotiable Instruments Act, 1881.
A demand draft (DD), on the other hand, is a pre-paid negotiable instrument issued by a bank, directing another branch of the same bank (or another bank) to pay a specified sum to the payee. It is a form of banker’s cheque and is defined under Section 85A of the Negotiable Instruments Act, 1881.

Key Differences Between Cheque and Demand Draft

Features of a Cheque

• Negotiable Instrument: Freely transferable by endorsement or delivery (unless crossed).
• Drawn on a Bank: Payable on demand from the account of the drawer.
• Revocable: Payment can be stopped before clearance.
• Personal Instrument: Depends on the credibility of the drawer.

Features of a Demand Draft

• Banker’s Instrument: Drawn and signed by a bank official, ensuring authenticity.
• Prepaid Instrument: Amount is collected in advance, reducing the risk of dishonour.
• Non-Negotiable: Usually payable to a specific person or organisation.
• Safe and Secure: Minimises the possibility of loss or fraud during transfer.

Legal and Operational Aspects

Both cheques and drafts fall under the provisions of the Negotiable Instruments Act, 1881, which governs the rights, liabilities, and protections of the parties involved. The dishonour of a cheque can lead to criminal liability under Section 138 of the Act, but such provisions do not apply to drafts since their payment cannot be refused.
Cheques can be either open (payable over the counter) or crossed (payable only through a bank account), while demand drafts are generally crossed by default to ensure safe transfer through banking channels.

Advantages and Disadvantages

Advantages of Cheque:

• Convenient and easy to use.
• No need to carry cash.
• Offers flexibility for payments and post-dated transactions.

Disadvantages of Cheque:

• Risk of dishonour.
• Time-consuming clearance.
• Susceptible to forgery or alteration.

Advantages of Demand Draft:

• High security and payment assurance.
• Useful for outstation transactions.
• Accepted widely for institutional and official purposes.

Disadvantages of Demand Draft:

• Involves service charges.
• Cannot be countermanded or altered once issued.
• Requires visiting a bank for purchase.

Practical Usage and Importance

Cheques are primarily used for routine transactions, such as salary payments, bill settlements, and personal transfers. They are preferred in local transactions where both parties maintain banking relations.
Demand drafts, however, are extensively used where trust and distance are factors—such as in educational payments, government fees, or transactions between parties in different cities. They are also favoured in formal and official dealings requiring assured payment.