What is a Demand Draft?
A demand draft or a DD is a negotiable instrument issued by the bank. The meaning of negotiable instrument is that it guarantees a certain amount of payment mentioning the name of the payee. It cannot be transferred to another person in any situation.
The bank issues the draft to a client (drawer) directing another bank or own branch to pay the specific amount to the payee. Demand drafts can be compared to cheques but these are hard to counterfeit and more secure. This is because the drawer has to pay before issuing a demand draft to the bank whereas cheque can be issued without ensuring the sufficient funds in your bank account. Therefore, cheques can bounce but drafts assure a safe and on-time payment.
The drafts are payable on demand. It cannot be paid to the bearer but the beneficiary has to present the instrument directly to the branch. It can also be collected by the clearing mechanism of the bank. Mostly, demand drafts are issued in situations where the parties are unknown to each other and lack trust. It comes handy in such situations as there are almost no chances of fraud and counterfeiting.