Understanding Demand Draft
Demand Draft or DD refers to a financial instrument used to make payments, which can be used by an individual or a bank. Demand Draft is a secure way to transfer funds from one account to another easily. It is different from cheque since the account holder’s signature is not required for a Demand Deposit.
Unlike cheque, demand drafts are prepaid and also guaranteed by the issuing bank.
Any demand draft is issued by the bank using the money from the customer’s account who requested for a DD. There are 3 parties in Demand Draft: Drawer, Drawee and Payee.
- Drawee is a customer who requests for a demand draft and
- Drawer is the issuing bank.
- Payee is the person or party who receives the DD.
DD contains the name of the payee and the Demand Draft can only be transferred to the payee.
Key Features of DD
- Prepaid: The money that needs to be transferred using a DD is already paid to the issuing bank. Later the bank issues the draft and ensures that the funds are guaranteed.
- Bank guarantee to the Payee: Bank issues the payee and builds trust for the availability of the funds.
- Payable on Demand: Anytime between the validity period, the DD is payable on demand
- Security and Verification: A demand draft requires identification and verification for its issuance and encashment, adding a layer of security compared to personal checks.
Benefits of DD
- Guaranteed Payment: Banks ensure that the payee receives the full amount of the DD since it is prepaid and guaranteed.
- Reduced Risk: The risk of dishonor or bounced payments is very less in comparison to personal checks.
- Security: Provides a secure way to make payments, reducing the risk of fraud compared to cash transactions.
Uses of Demand Draft
- Big Transactions: Often used for significant payments where security and guaranteed payment are crucial, such as real estate transactions, business deals, or large purchases.
- Bank-to-Bank Transfers: Using a DD, money between various banks can be transferred easily even if the payer and payee have accounts in different banks.
- International Payments: In order to ensure security of payments across the borders, DD is a good financial tool.
