What is Demand Draft: Its Types & Features

Have you ever wondered how you can transfer money from one bank to another? Demand Draft (DD) offers you a safe and reliable solution. Being a pre-paid method of payment, demand draft is issued by banks on behalf of the payer to transfer money to the payee’s bank account. Unlike cheques, demand drafts are not prone to bouncing, as the amount is already debited from the issuer’s account at the time of creation.

Through this comprehensive blog, we will understand the meaning of demand draft along with its features, types, processes, validity and other essential information that will make the process of issuing demand draft easier and hassle-free.

What is a Demand Draft (DD)?

A demand draft, also known as a DD, is a payment method used to transfer money from one bank account to another. When a bank creates a demand draft, the requested amount is taken from the account of the person who asked for it and is sent to another bank account. The person requesting the draft is called the drawer, the bank that pays the money is the drawee, and the one receiving the money is the payee. 

DD is convenient, secure and easy to use as it is a pre-paid instrument that ensures the recipient receives the exact amount as stated on the draft. Furthermore, DD are issued only by the banks and cannot be issued at individual level, thus eliminating any potential risk or fraud as banks issue them only when the drawer has sufficient money in their account. 

Features of Demand Draft 

• A demand draft is an unconditional payment order, meaning it is payable only on demand. 
• Unlike cheques, demand drafts do not need any signature to authorize them and are not directly payable to the bearer. 
• DDs are issued only when there are sufficient funds in the bank account, which ensures that DDs cannot bounce and are associated with safe and timely payments.
• A demand draft is issued when the parties involved are unknown to one another and lack trust among them. 
• If the demand draft isn’t delivered on time, the amount is refunded to the initiator.

Types of Demand Draft (DD)

• Sight Demand Draft: This type of demand draft is paid to the payee immediately. Sometimes, banks request specific documents from the payee and would only pay the draft after those documents are provided. 
• Time Demand Draft: In this type of demand draft, the bank pays the amount only after a specified period, i.e., the demand draft clearing time.

How to Make a DD?

Offline Process:

Step 1: Visit your nearest bank branch where you want to get the demand draft.

Step 2: Request the bank staff for a demand draft application form.

Step 3: Carefully complete the form with the required details. Mention important details such as currency, total amount, and payment reason.

Step 4: Give the completed form to the counter for demand draft issuance.

Step 5: Pay for the demand draft using cash, check, or by deducting from your bank account if you already have one with the bank.

Online Process:

Step 1: Visit your bank’s official website and log in to your internet banking account.

Step 2: Find and select the “Request and Enquiries” section in your online banking account.

Step 3: Click on the option to “Issue Demand Draft.”

Step 4: Choose the account from which the DD amount will be deducted.

Step 5: Input the amount, payee’s details, and purpose of the DD if required.

Step 6: Enter the branch code of the bank where you want the DD to be issued and select the branch where the DD should be payable.

Step 7: Choose method of delivery of DD: either pick it up in person or have it delivered by courier.

Step 8: Carefully review your details and click “Submit” to complete the process. 

How Does a Demand Draft Work?

Here’s a step-by-step overview of how a Demand Draft works:

Requesting the DD:

• Initiation: The payer (drawer) visits their bank (drawer bank) and requests the issuance of a demand draft. They provide the amount, payee details, and the destination bank where the DD should be sent.
• Payment: The payer deposits the amount they want to transfer, plus any applicable fees, into their bank account.

Issuance of the DD:

• Draft Preparation: The bank prepares the DD, which includes the payer’s information, payee’s name, the amount, and the drawee bank’s details. It is a pre-paid instrument, meaning the amount is deducted from the payer’s account upfront.
• DD Details: The DD contains a unique serial number for tracking and verification.

Delivery to the Payee:

• Physical or Electronic: The DD can be collected physically by the payer or delivered electronically to the payee.
• Payee Receipt: The payee receives the DD and can deposit it into their bank account or present it for encashment.

Clearing and Settlement:

• Presentation: The payee deposits the DD into their bank (payee bank). The payee bank sends the DD to the drawee bank for clearance.
• Verification: The drawee bank verifies the DD’s authenticity and ensures sufficient funds are available.
• Settlement: Upon successful verification, the drawee bank transfers the funds to the payee bank. The payee bank credits the amount to the payee’s account.

Completion:

Confirmation: Both the drawee and payee banks update their records to reflect the transaction. The DD is marked as settled, and the transaction is complete.

What Details are Required for Filling Demand Draft Form?

• Date: The date on which the demand draft is issued.
• Name of the Applicant: The full name of the individual or entity requesting the demand draft.
• Name of the Recipient: The name of the person or organization to whom the demand draft is payable.
• City Name: where the demand draft is to payable.
• Bank Branch Name: where a demand draft is issued.
• DD Amount: The amount of money specified on the demand draft.
• Service Fee: The fee charged by the bank for processing the demand draft.
• Signature of the Applicant: The signature of the person or entity requesting the demand draft.
• Particulars of the Money Deposited: Details of the deposit made to cover the amount of the demand draft.

What are the Charges for Demand Draft? 

Demand Draft Validity 

Demand drafts remain valid for 3 months from the date of issue (as printed on the DD). If not presented within this validity period, the DD becomes invalid. However, even if the drawer made a payment from their bank account, the amount is not refunded automatically.

Things to Consider While Issuing a Demand Draft

• Choose your payment method before completing the DD form. Provide either cash or your bank account details, depending on the payment medium.
• Ensure the recipient’s name, payee’s information and the amount to be paid are accurately written to avoid issues during cashing or deposit.
• Keep PAN card details ready if the DD amount exceeds INR 50,000.
• Follow the bank’s guidelines and instructions for issuing the demand draft correctly.
• Check the validity period of the demand draft to ensure it’s used within the allowed timeframe.

How to Write a DD Cancellation Letter?

A letter for cancellation of demand draft must be written by the individual who had submitted it. It needs to have a specified format:

• Ensure the letter maintains a formal structure and keep the tone professional and direct.
• The letter should be addressed to the Bank Manager.
• Next, include a clear subject line indicating the purpose of the letter, mentioning the DD number.
• State your account number, DD number, and the amount of the DD.
• Provide a brief and clear reason for the cancellation as the body of the letter. 
• End the letter formally with your full name. 

RBI Guidelines for DD

• Banks must ensure that demand drafts of ₹20,000 and above are always issued with an account payee crossing.
• The draft form should clearly indicate the validity period at the top, and all drafts should be uniformly valid for three months. The process for revalidating drafts after this period should be simplified.
• For small amounts, banks should issue drafts against cash to all customers, regardless of whether they hold an account with the bank. Bank counter staff must not refuse to accept small denomination notes from customers (or non-customers for the issuance of drafts).
• A duplicate demand draft, up to and including ₹5,000, may be issued to the purchaser based on sufficient indemnity without requiring a non-payment advice from the drawee office, regardless of the legal requirements.
• Banks should issue the duplicate demand draft within two weeks of receiving the request. If there is a delay beyond this period, banks are advised to pay interest at the rate applicable to fixed deposits of similar maturity to compensate the customer. This two-week timeframe applies only when the request is made by the purchaser or beneficiary, and does not apply to cases involving third-party endorsements.

Difference Between Cheque and a Demand Draft?

Demand drafts are frequently chosen for making payments of substantial amounts, providing greater convenience compared to cash or cheque payments. A notable advantage is their suitability for cross-border transactions. However, it’s important to remember various factors such as the validity of the demand draft, cancellation rules, and other relevant aspects before utilizing it as a payee.