What is a Demand Draft?
A demand draft, also known as a bank draft or sight draft, is a payment instrument that guarantees payment to the payee upon presentation. It is essentially a check drawn by a bank on its own funds.
How Does a Demand Draft Work?
- Applicant Applies: The person or entity wishing to make a payment (the applicant) goes to a bank and requests a demand draft.
- Bank Issues Draft: The bank issues the draft, deducting the amount from the applicant's account.
- Payee Receives Draft: The applicant delivers the draft to the payee.
- Payee Encashes Draft: The payee can present the draft to any bank (not just the issuing bank) to receive payment.
Key Features of a Demand Draft:
- Guaranteed Payment: The bank issuing the draft guarantees payment to the payee.
- Safe and Secure: Demand drafts are a safer payment method than cash or personal checks, reducing the risk of fraud or loss.
- Convenient: The payee can cash the draft at any bank, making it a convenient method of payment.
- No Need for Bank Account: The payee does not need a bank account to receive payment.
Uses of Demand Drafts:
Demand drafts are commonly used for:
- Large Transactions: Payments for property, vehicles, or other high-value items.
- Inter-City or International Transactions: Facilitating payments between parties in different locations.
- Transactions Requiring Guaranteed Payment: Where the payee requires assurance of payment, such as in legal settlements or business contracts.
- Paying Taxes or Fees: Government agencies may accept demand drafts as payment for taxes, fees, or other dues.
- Paying Suppliers or Vendors: Businesses often use demand drafts to pay suppliers or vendors.
Advantages of Demand Drafts:
- Safety and Security: Reduces the risk of fraud or loss.
- Convenience: Easy to cash at any bank.
- Guaranteed Payment: Assures the payee of payment.
- Credibility: Adds credibility to the transaction.
Disadvantages of Demand Drafts:
- Cost: Banks usually charge a fee for issuing a demand draft.
- Time Consuming: Obtaining a demand draft may take some time.
- Limited Availability: Not all banks issue demand drafts.
Conclusion:
Demand drafts are a secure and convenient payment method for large transactions, payments between distant parties, and situations where guaranteed payment is crucial. They are particularly useful when dealing with transactions involving high-value items or when the payee does not have a bank account.