Understanding Bank Drafts and Bills of Exchange
A bank draft and a bill of exchange are both financial instruments used for payment purposes, but they have distinct characteristics and purposes.
A bank draft is a payment order issued by a bank on its own funds. It's essentially a check drawn on the bank itself, guaranteeing payment to the beneficiary upon presentation.
A bill of exchange, on the other hand, is a written order by one party (the drawer) to another party (the drawee) to pay a certain sum of money to a third party (the payee) at a specified date or on demand.
Key Differences:
- Issuance: Bank drafts are issued by a bank, while bills of exchange can be issued by any party.
- Guarantor: A bank draft is backed by the bank's own funds, guaranteeing payment. Bills of exchange rely on the drawee's financial standing.
- Payment: Bank drafts are typically paid on demand, while bills of exchange have a maturity date or are payable on demand.
Is a Bank Draft a Bill of Exchange?
While both instruments share some similarities, a bank draft is not technically a bill of exchange. Here's why:
- Drawee: In a bill of exchange, the drawee is a third party, not the issuer itself. A bank draft's drawee is the bank itself.
- Guarantee: Bank drafts are inherently guaranteed by the bank, unlike bills of exchange, which rely on the drawee's creditworthiness.
Conclusion:
In conclusion, while both bank drafts and bills of exchange are payment instruments, they differ in their origin, guarantee, and payment mechanisms. A bank draft is not technically a bill of exchange because it's issued and guaranteed by the bank itself, unlike bills of exchange, which involve a separate drawee.