Demand Draft: Meaning, Types, How It Works, and Benefits

Posted on Monday, September 23rd, 2024 | By IndusInd Bank

Have you ever faced a situation where a cheque or cash payment was not accepted? For instance, many educational institutions require payment through a Demand Draft (DD) instead.

Curious to learn more about how demand drafts work and why they are a preferred method of payment. Continue reading as we delve into the details of DDs, with examples and reasons for their widespread use. 

What is DD in Bank?

A demand draft is a prepaid financial product that allows the transfer of funds from one individual or entity to another without the need for cheques or cash. They are widely used for reliable and secure transactions, especially when huge sums of money are involved or when the parties involved have no mutual trust.

The financial institution issuing the DD assures the payment. Thus, ensuring that the beneficiary receives the amount on presenting the draft. To obtain a DD, the drawer must approach a financial institution and provide the required funds along with the applicable charges. The financial institution then issues the DD, which can be deposited by the beneficiary into their bank account or encashed at any branch of the issuing financial institution.

Let’s take an example of a student in Kolkata who needs to pay their first-year college fees in Mumbai. Instead of sending a cheque or cash, which can pose risks of bouncing or loss, the student can obtain a demand draft from their bank in Kolkata and post it to the college in Mumbai. This method ensures that the college receives fee payment securely and promptly.

Unlike cheques that bounce if there are inadequate funds, a demand draft is already paid for. This means the funds are already secured by the financial institution at the time of issuance. Hence, there is assurance that the payment will be honoured, offering an added layer of security for both, the payer and the recipient.

Types of Demand Draft 

Demand drafts generally come in two main types, based on when the payment is released: 

1. Sight Demand Draft 

This one’s straightforward. A sight demand draft is payable right away—no waiting involved. As soon as the beneficiary presents it at the bank, the bank verifies the details and releases the funds. It’s a go-to option when payments need to be made without delay. 

2. Time Demand Draft 

This one works a little differently. A time demand draft isn’t payable immediately. Instead, there’s a set waiting period—agreed upon at the time of issue. It’s commonly used when the payment is supposed to happen on a later date, not right away. 

So, while both ensure secure fund transfers, the difference lies in when the money gets released. 

How Does a Demand Draft Work? 

A demand draft (DD) is basically a prepaid order issued by a bank—one that promises to pay a fixed sum to the person named on it. Here’s how the process typically plays out: 

1. The person who needs to send the money (called the remitter) approaches the bank and pays the amount upfront, either in cash or from their account. 

2. The bank prepares the draft and instructs a particular branch to pay that amount to the named beneficiary. 

3. The beneficiary then deposits the draft into their own bank account or presents it for encashment. 

Because the payment is guaranteed by the bank, there’s no risk of it bouncing—unlike with personal cheques. 

Components of Demand Draft Form 

When you apply for a demand draft, the bank will give you a form to fill out. The design may vary a bit depending on the bank, but here’s what it usually asks for: 

• Your name and contact info 

• The amount you want to send (written in numbers and words) 

• How you’re paying—cash or from your account 

• The name of the person or organisation you’re sending the money to 

• The city or branch where the draft will be payable 

• The reason or purpose for the DD 

• Your signature 

These details help the bank process the request properly and ensure that the money reaches the right person. 

Steps Involved in Issuing a Demand Draft 

If you’ve never had to get a demand draft made, here’s what the process usually looks like: 

Step 1: Visit your bank branch. Some banks also let you apply online. 

Step 2: Fill out the DD application form. 

Step 3: Pay the amount you want to send, either in cash or by debiting your account. 

Step 4: Cover any applicable charges—the bank will tell you how much. 

Step 5: Once it’s processed, the bank will hand over the demand draft. 

Step 6: You then pass it on to the person it’s meant for, who can deposit or cash it. 

Simple and secure—that’s why DDs are still used for certain payments.

Features of a Demand Draft

Demand Drafts offer an array of features, making it an excellent choice for families. Here’s a detailed look at the features:

Read More: The Importance of Saving Money: Tips for Building Your Savings

Advantages of Demand Draft 

In an era of instant UPI transfers, you might wonder why anyone still uses demand drafts. But there are a few good reasons: 

• No risk of bouncing: Since the bank collects the money in advance, there’s no chance of non-payment. 

• Still widely accepted: Many colleges, government offices, and some companies prefer DDs. 

• Good for remote transfers: Especially where digital banking options are limited. 

• Added security: Compared to personal cheques, DDs (especially if crossed) offer better protection. 

Challenges with Demand Draft 

That said, demand drafts aren’t perfect. Here are a few drawbacks to keep in mind: 

• Physical process: You’ll need to visit the bank, collect the draft, and physically deliver it. 

• Extra fees: Banks usually charge for issuing DDs, and the cost varies. 

• Slower compared to digital transfers: It can take a day or two for the funds to clear. 

• Not ideal for small or frequent payments: UPI, NEFT, or IMPS are often faster and cheaper. 

Still, demand drafts remain relevant in specific situations where reliability and formal documentation matter more than speed.

Ending Note

A demand draft is a widely accepted and secure financial instrument for making payments. Its prepaid nature ensures there is no risk of inadequate funds, making it a trusted method for huge and crucial transactions. Additionally, with Indus Select Savings Account by IndusInd Bank, you not only get a safe way to manage your finances and prepare demand drafts but even enjoy various family-centric advantages that add considerable value.

Ready to experience the benefits offered by this savings account? Open a bank account with IndusInd Bank today and secure your family’s financial future today!

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.