Demand draft is a negotiable instrument that contains an order of the bank directing other branch or bank to pay the payee (beneficiary) mentioned amount in the draft. A demand draft is a fund transfer instrument issued by the bank on the request of the drawer. It guarantees the payment of the specific amount and it cannot be transferred to another person.
Demand drafts are payable on demand and they offer a more secure way of receiving payments. This is because they are hard to counterfeit and the drawer has to pay the bank first to issue a demand draft. This is also a reason that most businessmen prefer demand drafts over cheques as cheque can bounce and the chances of fraud as also high with cheque.
In addition, a demand draft cannot be paid to the bearer but the receiver (payee) has to present the instrument to the bank. Banks often collect demand drafts through their clearing mechanisms. Demand drafts are a good way to receive payments when two parties do not know each other. A demand draft becomes useful in such situations as it assures the payment with considerably low chances of counterfeit.
What are the types of demand draft?
Demand drafts issued by different banks are more or less similar but these can be classified as per their nature of payment.
- Sight demand Draft: Sight demand draft is payable when the payee presents certain documents to the bank. The bank verifies those documents and pays the amount to the payee. The payment is denied if the documents are not appropriate or correct.
- Time Demand Draft: This type of demand draft is payable at a certain time. The draft is not payable if the payee presents the draft to the bank before the specific time.