What Is Demand Draft and How Does It Work?
Payment processes and methods in the modern era may have started to depend on technology; however, traditional forms of transactions are still the most reliable and accessible for the general public. A demand draft or DD is one such pre-paid negotiable instrument issued by banks to transfer funds from one bank to another. Negotiable instrument means it guarantees a certain amount of payment mentioning the name of the payee.
This blog sheds light upon why banks issue demand drafts and how they work.
What is a Demand Draft?
A Demand Draft (DD), is a bank-issued negotiable instrument. A negotiable instrument promises a specific payment amount while providing the payee’s name. In no circumstance can it be transmitted to someone else.
- The bank issues the Draft to a client (drawer), instructing a different bank or a branch of its own to pay the specified sum to the payee.
- Demand drafts are comparable to cheques, except they are more secure and challenging to forge.
- The drafts are refundable upon request. The beneficiary must deliver the instrument in person to the branch; it cannot be paid to the bearer. Additionally, the bank’s clearing system can collect it.
- Demand drafts are typically issued when the parties don’t know each other.
How does a Demand Draft Work?
You don’t need to have a bank account to avail of demand draft facility. If you want to pay a sum of money to an institution or entity via DD, you can walk into a bank and ask for a draft form. Fill out the form with the amount. The sum can be paid via cash or cheque.
Types of Demand Drafts
There are two types of Demand Drafts:
1. Sight Demand Draft
A sight demand draft, frequently used when buying goods on the international market, is promptly payable. For instance, if a vendor sends goods to a buyer, ownership of the goods remains with the seller until the buyer receives them. A sight demand draft can be used by the buyer to quickly send funds to the seller, enabling the seller to quickly transfer ownership to the buyer.
2. Time Demand Draft
A time demand draft is not immediately payable; it has a set pay date in the future. It won’t become fully payable until a certain amount of time has passed since the payee received the goods. Some shipping businesses may use a time-demand draft in international trade. For instance, importers may release a time demand draft to exporters. Still, the ultimate payment is not released until 15 days after the importers have received the shipment, the products, and the transfer of ownership.
Also Read: What Is A Cheque? Know Its Features, Benefits And Types
How to Make Demand Drafts?
Forms for demand drafts can be requested from the bank, or they can be completed online. You must provide certain crucial information, such as your method of payment (cash or cheque), the beneficiary’s name, the location where the Draft will be cashed, the cheque number, the number of your bank account, your signature, etc. If you are paying more than Rs. 50,000 by cheque. You must additionally submit information about your PAN card.
You must pay a few fees for the Draft, subject to the bank’s regulations. There is always a specific standard, regardless of the allegations. Let’s discuss them next.
Charges for Demand Draft
There are no set fees for creating a DD; instead, they typically vary depending on the bank and the amount of the demand draft.
Draft on Demand Charges are flexible and change based on the Draft’s value. A variable cost of Rs. 1.5 to Rs. 4 per thousand plus service tax is typically charged by banks. However, they may impose flat fixed fees if the Draft’s value is low. For customers of Privilege Banking, the fees might be cheaper.
If the person on whose behalf the demand draft was drawn wishes to cancel the Draft, he may do so by submitting a written request and the demand draft to the banker from whom the Draft was drawn. The bank will then cancel the demand draft and reimburse you for the amount of the Draft. The standard range for the draft cancellation fees is Rs. 100 to Rs. 300 per DD.
How to Cancel a Demand Draft?
One must visit the bank to cancel a demand draft because they are only issued after accepting payment.
If you made a cash payment, you can cancel the demand draft and receive a refund by giving the bank the original demand draft and the receipt. Keep in mind that the bank may levy cancellation fees of up to Rs 150.
If you paid by cheque for the demand draft amount, you must fill out a cancellation form and submit it with the original Draft for the money to be credited to your account.
What to do if the Demand Draft is Expired?
A demand draft is good for three months from the date of issuance. The demand draft then becomes invalid. It should be noted that the funds won’t be placed into the drawer’s account even after the demand draft expires.
The drawer, who must go to the bank to revalidate the demand draft, may extend the demand draft’s expiration date by another three months. Remember that only the drawer has the authority to revalidate the demand draft, not the payee or anybody else. Additionally, it cannot be revalidated if the demand draft expires a second time.
What is a Demand Draft Fraud?
Demand draft fraud is widespread despite being one of the safest money transfer methods. Such crimes may also be caused by the misuse of digital data and the accessibility of high-end technology.
When a fraudulent demand draft (DD) is issued in the payee’s name, this is known as demand draft fraud. In such circumstances, locating the individual who issued the bank draft becomes more difficult, and the payee must deal with legal difficulties. When a phony DD is presented to a bank, the bank may file an FIR in the payee’s name, and that person will then have to go through the legal processes.
This could cause someone a lot of problems. Therefore, it’s crucial to go by a few straightforward guidelines to prevent and handle this kind of fraud.
- Maintain Correct Information from Drawer: Always take note of the drawer’s correct contact information and be sure to double-check it. Although not completely foolproof, this method will enable you to focus your search and find the scammer. Keep accurate records of your interactions with the drawer or during conversations to ensure that you never fall victim to suspicion.
- Always Maintain a Copies of the Draft: Create a coloured copy and save it securely. This will assist you in determining the tactics utilised to forge the Draft, particularly when doing so involves considerable amounts of money.
- Take immediate legal action: When a mock draft is presented, banks typically take legal action against the payee immediately. This is so that they can follow the rules and take action to prevent accidents. You must now battle three fronts, file a counter FIR, and seek serious legal counsel. The first is to go through the legal process, the second is to find the fraudster, and the third is to make an effort to make up for your loss. Additionally, getting in touch with the drawer branch is a smart option because they can give you crucial details about the drawer, like CCTV footage and contact details.
Also Read: Apply For Short Term Loans In India: Benefits, Eligibility Criteria, Steps to Apply
Difference between a Demand Draft and a Cheque
Here are some of the difference between DDs and cheques:
| Demand Drafts | Cheques |
| Solely payable to the individual/entity named on the draft | Receivable to the holder based on crossed or uncrossed cheque |
| Types of DD – Sight DD and Time DD | Types of cheques – Bearer’s, Order, Uncrossed, Crossed, Stale |
| Issued by banks | Customers can issue cheques |
| Bank charges are applicable | No charges levied on cheques |
| DD dishonour isn’t possible | Cheque dishonour is possible if there’s insufficient balance in the bank account |
| Safer mode of transfer between two entities | Easier mode of transfer but not as secured as DD |
Final Word
Keep a photocopy of DD to avoid any kind of legal hassle. Also, make sure you have all the information regarding the drawer. This could help you against demand draft fraud. Remember that DD fraud is a common practice, so be extra cautious before presenting DD to a bank.
FAQs on Demand Draft
Ans: Banks now have guidelines from the RBI on how to handle dishonest people who sign fake demand drafts. According to the rules, account payee crossover is allowed for DDs worth more than 20,000.
Ans: Since the RBI has issued strong instructions not to release a demand draft for more than 50,000 in cash, banks may only accept a limit of 49,999.
Ans: If a demand draft is misplaced or lost, banks may also generate a copy. Before issuing a new Draft, the bank assesses a small cost and nullifies the old one. Based on appropriate indemnification, the institution may release a demand draft for 5,000 or less without first receiving Non-Payment Advice.
Ans: Since they have a monetary value and are the safest payment option, demand drafts are typically used by the government and educational institutions. The drawer must make the required payment to the bank, which serves as a guarantee for the promised funds, before the Draft may be released. On the other hand, not even account payee cheques ensure that the payee will get the money.
Ans: Banks provide demand drafts regardless of the drawer’s bank account information. Regarding payments made in cash or cheques, a DD may be issued. Demand drafts issued by cheque must be drawn from a bank account.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
