Friday, January 30, 2015

Demand Draft (DD)

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Demand Draft
It is a negotiable instrument similar to a bill of exchange, with some special features.

Demand Draft or DD is always issued by a bank (drawer) on behalf of its customers after taking the amount from him/her. The bank then directs another bank or its own branches (drawee) to pay a certain sum (the amount received from the customer) to the specified party (payee, whom the customer wants to pay).

You could think that why would you use a Demand Draft instead of a Cheque. There are few good reasons behind it -

  • Before issuing a DD, the bank will take the amount (advance payment) from the customer, i.e., the payment is guaranteed. But in case of Cheque, it could bounce, if the account of the customer doesn't have sufficient balance in it. So, to eliminate the risk, the payee could ask you to provide a DD instead of a Cheque.
  • For issuing a DD, you don't need a bank account, you can go to the bank counter, and issue it. But cheque is inherently related with a bank account.

Now, try to understand about the differences between a Demand Draft and a Cheque -


Demand Draft (DD)
Cheque
Parties
Drawer – bank only (individual pays), Drawee – Same or other banks, Payee – any party
Drawer – individual/ac holder, Drawee – banker of individual, Payee – any party
Negotiability
DD can only be made payable to a specified party, also known as pay to order
Cheques can also be made payable to the bearer, along with pay to order
Payments
Orders of payment by a bank to another bank
Orders of payment from an account holder to the bank
Honor
Always honored, because already paid
Can be dishonored, depending on account balance
Guarantee
Issuer party is backed by a bank guarantee
Issuer party is liable to the cheque and not backed by a bank guarantee
Defined
Not precisely defined in NIA Act
NIA Act, 1881

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