What is Demand Draft? Meaning, Types, Uses, and Benefits

What is a Demand Draft in Banking?

Demand Draft is commonly known as a DD in daily banking services and it can be defined as a prepaid instrument that can be used to transfer money safely from one person or organisation to another, without needing to carry cash or write cheques. People often choose it for secure and reliable transactions, especially when a large sum of money is involved or when there is no direct trust between the two parties.

A DD is issued by a bank after the drawer (the person making the payment) deposits the money along with applicable charges. Since the money is prepaid, the bank assures that the draft will be honoured once the beneficiary (receiver) presents it. The beneficiary can either deposit the DD in their bank account or encash it at the issuing bank’s branch.

To better understand what is a demand draft, let us take an example. Suppose a student in Delhi wants to pay university fees in Pune, they can get a DD issued from their local bank. The university can then deposit the draft without worrying about cheque bounces or delayed transfers.

Unlike cheques that may bounce if there are insufficient funds, a demand draft ensures payment because the bank has already collected the money in advance, offering complete security and trust.

Demand Draft Validity

A DD is valid for three months from the date it is issued. If the draft is not presented to the bank within this time, it becomes invalid and cannot be encashed. The exact validity may vary slightly depending on the issuing bank, the amount, and the location of the transaction. Once a DD expires, the money is not lost, but you need to request an extension or revalidation from the issuing bank. This ensures that the payee can still use the funds after the original validity period has passed.

Types of Demand Drafts

There are two types of Demand Drafts:

Sight Demand Draft:

A Sight Demand Draft is a bill of exchange requiring the payer to make immediate payment when it is presented. The payee, or recipient of the draft, must usually provide certain documents to the bank for verification before the payment is released. The bank will not pay the draft if the payee does not provide the required documents,

Time Demand Draft:

A time Demand Draft is a type of payment only payable after a specified period, known as the Demand Draft clearing time. The payer agrees to pay on a specific date, and the bank processes the payment accordingly.

Features of a Demand Draft

These are the following features of a Demand Draft:

Secure

Demand Drafts are safer than cheques because they cannot be counterfeited, and banks only issue them if the drawer has enough money. They also do not require the account holder’s signature.

Convenient

They are a convenient way to transfer large amounts of money, and there are no limits on the amount that can be transferred.

Accepted widely

Demand Drafts are widely accepted across the nation. They are easily accessible and are useful in various instances.

Prepaid

The money for a Demand Draft is deducted from the drawer's account when issued, so it cannot bounce if the payer's account has insufficient funds.

Fixed amount

The amount of a Demand Draft is set and cannot be changed, so the payee is guaranteed to receive the correct amount.

What is the Demand Draft Used for?

A Demand Draft is a secure payment mechanism, commonly used for significant transactions such as real estate purchases, education fees, and financial commitments. They are also a safer alternative to cheques, especially when dealing with someone you don't know well because the bank confirms the sender's finances before issuing the DD.

What Details are Required for Demand Drafts?

Difference between Cheque and Demand Draft

Here are the major differences between a cheque and a demand draft:

How to Issue a Demand Draft?

Users can issue a Demand Draft using online and offline methods at their convenience.

Offline

Visit the nearest ICICI bank branch, and the executives will hand you a Demand Draft form. Carefully fill out the form and submit it.

Online

Demand Drafts can be issued online as well. Follow these steps:

1. Log in to your ICICI Bank’s internet banking account using your ID and password.
2. Go to Services
3. Select Instabanking Services
4. Select Request DD/PO
5. Fill in the required details.

Benefits and Drawbacks of Demand Draft

This section explains the benefits and drawbacks of the Demand Draft:

Benefits

• Security: Demand Drafts are guaranteed by the issuing bank, so the recipient can be certain that the payment will be completed.
• Reliability: They are a more dependable alternative to wire transfers.
• Convenience: They may be issued from any bank, making them a convenient way to transfer payments.

Drawbacks

• Cost: Banks often charge a fee for issuing a Demand Draft, which may be more than the cost of alternative payment options.
• Time: Demand Drafts can sometimes take several days to clear, which can be time-consuming for transactions that require quick payment.
• Fraud: Like any other payment method, they are susceptible to fraud. So, it is crucial to check the draft is issued by a reputable bank and that all information is correct.

How to Cancel Demand Draft?

Before cancelling a DD, it’s important to know that once a DD is delivered to the payee, it cannot be cancelled. A DD is valid for three months; if it isn’t used within this time, the funds may lapse. To cancel a DD, you need to write a formal cancellation letter to your branch manager. The letter should clearly mention the reason for cancellation, along with your account number, DD number, and amount. Submitting this letter with the original DD helps the bank process your request smoothly.

Conclusion

In conclusion, Demand Drafts (DD) offer a secure and reliable method for transferring funds, providing assurance that personal cheques cannot match. By guaranteeing immediate payment and ensuring the funds are set aside in advance, DDs are a trusted financial tool for significant transactions such as real estate purchases, education fees, and other large financial commitments. Their ease of issuance, both online and offline, further enhances their convenience, making them accessible for users without existing accounts at the issuing bank.

Despite some drawbacks, such as issuance fees and potential delays in clearing, the benefits of security, reliability, and wide acceptance make Demand Drafts a preferred choice for many. Understanding the types and features of DDs can help users make informed decisions, ensuring their transactions are smooth and secure. Whether for personal or business use, Demand Drafts remain a valuable instrument for financial transactions, offering peace of mind and stability in a variety of scenarios.

FAQs

What is the purpose of a DD?

The purpose of a Demand Draft (DD) is to ensure secure, assured payments. Since it is prepaid and issued by the bank, it eliminates the risk of dishonour due to insufficient funds. It is commonly used for official payments, fees, and large transactions requiring safety.

Can I take DD from any bank?

Yes, you can take a Demand Draft from almost any bank, even if you don’t hold an account there. However, in such cases, you must pay the amount in cash. If you are an account holder, you can request a DD through cheque, withdrawal, or transfer.

Is DD safer than a cheque?

Yes, a Demand Draft is considered safer than a cheque. A cheque may bounce if the drawer has insufficient funds or stops payment. But a DD is prepaid and issued by the bank itself, making it a secure instrument with zero risk of dishonour or fraud.