Understanding Demand Drafts in Banking: A Comprehensive Guide
A bank draft, often referred to as a demand draft, is a financial tool that has been widely used in the global banking system for many years. This article dives into the intricacies of demand drafts, exploring their definition, characteristics, usage, and practical applications. We will also discuss how they differ from other payment methods like cheques.
What is a Demand Draft?
A demand draft is a type of bank draft that allows one bank to pay a specific sum of money to the bearer upon demand. It is a document that one bank issues, ordering another bank to pay a certain amount to the bearer or to a specified person. Like a traveller's cheque, a demand draft does not require the signature of the drawer, making it a convenient choice for those travelling abroad.
The Mechanism of a Demand Draft
A demand draft is typically issued by a bank branch according to the request of the customer. It is drawn on another branch of the same bank. Once issued, the draft is guaranteed for payment and cannot be stopped by either the bank or the customer who purchased it. This ensures a secure payment system, making it a preferred choice in trade transactions.
Key Features of Demand Drafts
Non-Stop Payment: Unlike a cheque, the payment of a demand draft cannot be countermanded. Payment is assured and the bank is discharged by payment in due course. Security: A demand draft is a relatively secure method for cashing checks. It does not require a signature to be cashed, unlike a normal cheque. Guarantee: Banks charge a nominal fee for issuing a demand draft, but the service offered is highly secure and assured. Use in International Transactions: Demand drafts are often used by travelers and businesses for their ease and security in international transactions.Legal and Regulatory Context
Section 85A of the Negotiable Instruments Act covers demand drafts under the Indian legal framework. Section 85 specifically defines a demand draft as an order of one branch of a bank to another branch to pay a certain amount to a person or his order. This legal definition further reinforces the secure and guaranteed nature of demand drafts.
Comparison with Cheques
One of the major differences between a demand draft and a cheque is that a demand draft does not require a signature for cashing. Cheques, on the other hand, require the signature of the drawer to be valid. Additionally, while a cheque can be stopped by the drawer at any time before it is paid by the bank, a demand draft is guaranteed for payment and cannot be stopped once it is issued.
User Guide
Understanding demand drafts is crucial for individuals and businesses involved in financial transactions. From a business perspective, demand drafts are preferred in trade transactions due to their assured and secure payment system. They also provide a convenient method for transferring money between bank accounts.
For travelers, demand drafts are a reliable choice for international transactions, as they are easily cashed and do not require the hassle of dealing with a personal cheque while abroad.
If you have any questions or need further clarification, feel free to reach out. Stay tuned for more articles on financial banking and money transfer products used in banking. Thank you for your interest in DevTech Finance.