Demand Draft

A demand draft is a method used by a person to make a transfer payment from one bank account to another, also known as a remotely created check (RCC). In order to direct another bank or another branch of the same bank (drawee) to pay the stated sum of money to the payee, it is given by a bank to a client (drawer). A demand draft can likewise be contrasted with a check. Since demand drafts can be utilized to dupe individuals, there are guidelines presently set up those permit casualties to recuperate assets from the holding bank. The money is debited from the drawer’s account when a demand draft is given to the drawer. It is automatically paid out to the payee in the form of cash or check until it is given to the payee and he/she presents it to the bank.

Nevertheless, demand drafts are difficult to counter. Request drafts may only be made payable, also known as pay to order, to a specified party. However, cheques may be made payable to the bearer as well. In some cases, the drawer and the payee can be a similar individual, as the cabinet might need to move cash starting with one financial balance then onto the next record at an alternate bank. In the case of a demand draft, however the purchase has already been charged to the issuing branch and the payee should necessarily collect payment from the payee branch.

Characteristics of a Demand Draft:

  • It is issued by the bank to another bank.
  • It is considered to be a negotiable prepaid instrument because when it is issued, the money is taken from the drawer’s account. Therefore, when the payee cashes it out as the payment is already made by the drawer, it will not bounce due to insufficient funds. As a result, compared to a check, it is more secure and comes with less risk.
  • It is simply payable to the payee composed on the demand draft, and it is payable on demand. It implies the payee can quickly be paid the predefined sum and can’t be halted from installment once he/she presents it to the bank to be gotten the money out.
  • The use of a signature to approve the transfer of funds does not require it. By fax, phone, or online, it can be allowed remotely. Instead of a signature, it will say “authorized by depositor” or “authorized by the drawer.”

Demand drafts are often referred to as sight drafts, as they are payable if submitted to the bank by sight. Demand drafts were initially designed to help legitimate telemarketers who wished to use their bank account numbers and bank routing numbers to borrow funds from client checking accounts. When we buy things online or over the phone, a demand draft may be used. It can additionally be used when there are ordinary debits from our financial institution account, such as invoice repayments.

Remotely produced cheques are often referred to as demand drafts in the US. Remotely created cheques are payment orders created remotely by the payee and accepted by the customer, using a telephone or the internet, by supplying the necessary details from a legitimate cheque, including the MICR code (Magnetic ink character recognition code). Return item fees, customer payments made remotely from the company, and transfer payments between different bank accounts are other common uses.

A demand draft is issued by a bank when a person issues a check. It is also drawn by a bank employee, while a check is drawn by a bank client. A slight demand draft is instantly payable and is also used abroad when buying products. Installment of a demand draft may not be halted by the cabinet as it might with a check. A period demand draft accompanies a set installment date later on, and it isn’t payable right away. It is only payable in full when the goods are purchased by the payee within a certain amount of time. While it is possible to hand-deliver a check, this is not the case with a draft demand.

 

Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com
  3. wikipedia