Demand Draft

A Demand Draft (DD) is a prepaid negotiable financial instrument issued by a bank that directs another branch or bank to pay a specified sum of money to a person or organisation named in the draft. It is one of the most secure methods of transferring money, especially when the payer and payee are located in different places.
A demand draft functions as a banker’s order, ensuring guaranteed payment to the recipient, since it is drawn by a bank on its own funds, not on the customer’s account directly.

Definition

A Demand Draft is an instrument issued by a bank instructing one of its branches (or another bank) to pay a certain amount to a specified person or entity (the payee) on demand. The drawer of the draft is always a bank, which means that payment is assured once the draft is presented.
In India, demand drafts are governed by the Negotiable Instruments Act, 1881.

Features of a Demand Draft

1. Issued by a Bank: Only banks have the authority to issue a demand draft; it is not drawn by an individual.
2. Prepaid Instrument: The purchaser pays the amount in advance to the bank (along with service charges), which ensures payment to the beneficiary.
3. Payable on Demand: The draft can be encashed by the payee at the bank branch on which it is drawn, without any delay.
4. No Risk of Dishonour: Since the draft is drawn by a bank, it cannot bounce due to insufficient funds — unlike a cheque.
5. Negotiable Instrument: A demand draft is transferable by endorsement unless it is specifically marked “Account Payee Only.”
6. Safer Than Cash: It is a secure means of payment and reduces the risks associated with carrying large amounts of cash.
7. Non-Payable to Bearer: A demand draft cannot be made payable to bearer; it must be payable to a specific individual or entity.

Parties Involved in a Demand Draft

1. Drawer: The bank issuing the demand draft.
2. Drawee: The branch of the same bank (or another bank) on which the draft is drawn.
3. Payee: The person or organisation in whose favour the draft is issued and who receives the payment.
4. Purchaser: The individual or company who requests and pays for the demand draft.

Procedure for Issuing a Demand Draft

1. Application: The customer fills out a Demand Draft Application Form, specifying details such as payee name, amount, city of payment, and purpose.
2. Payment: The applicant pays the amount (either in cash or through a debit to their account) along with applicable bank charges.
3. Issuance of DD: The bank issues the demand draft, containing details of the payee, issuing branch, amount, and date.
4. Delivery to Payee: The purchaser sends or delivers the draft to the beneficiary, who can then present it at the drawee branch for payment.

Format and Contents of a Demand Draft

A typical demand draft contains:

• Name of the issuing bank and branch.
• Date of issue.
• Serial number of the draft.
• Name of the payee.
• Amount in words and figures.
• Name of the drawee branch.
• Signature and seal of the issuing officer.
• Security features such as watermark, hologram, and MICR code (for identification).

Types of Demand Drafts

1. Sight Demand Draft: Payable immediately upon presentation.
2. Time Demand Draft: Payable after a certain period mentioned in the draft (though less common).
3. Crossed Demand Draft: The amount is credited directly to the payee’s bank account and cannot be encashed over the counter.
4. Account Payee Demand Draft: Specifically marked “A/C Payee Only,” ensuring that only the payee can receive the amount through their bank account.

Validity of a Demand Draft

The validity period of a demand draft is three months from the date of issue.If not presented within this period, it becomes stale and cannot be encashed. However, the purchaser may apply for revalidation or reissuance of the draft by the issuing bank.

Cancellation and Refund

If the draft is not used or delivered, the purchaser may request cancellation by submitting:

• The original demand draft.
• The receipt and identification proof.After verifying details, the bank cancels the draft and refunds the amount (after deducting applicable charges).

Difference Between Demand Draft and Cheque

Advantages of a Demand Draft

• High security and reliability.
• Assured payment to the beneficiary.
• Widely accepted by educational institutions, government offices, and businesses.
• Useful for transactions across cities or when payee and payer have accounts in different banks.

Disadvantages

• Inconvenience: Requires physical presence or paper handling.
• Processing Time: Slower than electronic transfers like NEFT or RTGS.
• Non-Refundable Charges: Bank commission is non-refundable even if the draft is cancelled.
• Limited Modern Use: Largely replaced by online payment methods in urban and corporate sectors.

Modern Relevance

Although the use of demand drafts has declined with the rise of digital banking, NEFT, RTGS, and IMPS, they are still used for:

• Educational institution fees.
• Government and tender payments.
• Transactions where electronic methods are not feasible or permitted.

Banks now issue computerised and secure demand drafts with enhanced verification features, ensuring authenticity and reducing fraud.