What is a demand draft (DD)?
– A demand draft is a paper payment instrument issued by a bank that guarantees payment to the named recipient (the payee). The customer requesting the draft (the drawer) gives the bank the funds in advance; the bank (the drawee) then issues the draft so the payee can present it to a bank for collection. Because the issuing bank takes the money up front, a properly issued DD reduces the risk of insufficient funds.
Key terms
– Drawer: the person or business who requests the draft and provides the funds.
– Drawee: the bank that issues and promises to pay the draft.
– Payee: the person or organization designated to receive payment.
– Prepaid instrument: a payment item funded before it is issued, as opposed to a personal check drawn on an account balance.
How demand drafts function (step‑by‑step)
1. The drawer requests a draft from their bank and provides the amount plus any issuance fee.
2. The issuing bank debits the drawer’s account (or accepts cash) and prints the draft naming the payee.
3. The drawer sends the physical draft to the payee (often by mail or courier).
4. The payee deposits or presents the draft at a bank. The payee’s bank forwards it to the issuing bank for clearing.
5. After verification and processing, funds are credited to the payee’s account.
Why people use DDs
– Guaranteed payment: because the bank already holds the funds, a DD is less likely to bounce than a personal check.
– Useful for large or formal transactions (e.g., tuition fees, property payments, vendor settlements) where a paper, bank‑backed instrument is preferred.
Checklist before requesting or accepting a demand draft
– Confirm the issuing bank’s name and contact information.
– Verify the exact payee name (spelling must match the payee’s account).
– Ask about issuance and delivery fees (including courier costs).
– Confirm expected clearing time and whether the issuing bank will hold funds until the draft is presented.
– If sending by mail/courier, choose a tracked, insured delivery method for high values.
– Keep the draft serial number and receipt from the issuing bank until funds clear.
Fees and timing
– Issuance fee: banks commonly charge a flat fee or a small percentage to issue a DD.
– Courier/postal fees: additional if delivery is required.
– Clearing time: typically several business days between deposit and funds availability; exact times vary by issuing/collecting banks and countries.
– Wire transfers (electronic bank transfers) are generally faster—often completed within hours for domestic transfers—but they also carry fees.
Cancelling a draft and lost/stolen drafts
– Because DDs are prepaid, the ability to stop or cancel one depends on the issuing bank’s policies and local rules. Some banks allow cancellation if the draft has not yet been presented and the drawer follows the bank’s procedures (which may require written requests and a cancellation fee). Other systems treat issued DDs as effectively irrevocable once issued.
– If a draft is lost or stolen, contact the issuing bank immediately. Banks typically require identification, the draft serial number or issuance receipt, and may ask for a written indemnity or police report before reissuing funds or stopping payment. Timing and requirements vary by jurisdiction and bank.
Comparing demand drafts with other payment methods
– Demand drafts vs. personal checks: DDs are issued by banks and usually prepaid, so they are less likely to bounce. Checks are written by account holders and can be returned for insufficient funds.
– Demand drafts vs. wire transfers (EFT): Wires move money electronically and are typically faster. Wires may be better for urgent transfers; DDs are used when parties prefer a paper, bank‑issued payment.
– Demand drafts vs. online payment systems: Digital platforms often provide immediate or near‑real‑time transfers and convenience for routine transactions. DDs remain relevant for formal transactions where a paper instrument or bank guarantee is required.
Worked numeric example
– Situation: You need to pay a vendor $12,000 by demand draft. Your bank charges a $12 issuance fee and a $25 courier fee to send the DD to the vendor.
1. You instruct your bank to issue a DD payable to “Vendor Ltd.” for $12,000.
2. The bank debits your account for $12,037 (= $12,000 + $12 issuance fee + $25 courier), and gives you a receipt showing the DD serial number.
3. The bank prints the DD and sends it by tracked courier to Vendor Ltd.
4. Vendor Ltd. deposits the DD at its bank. Depending on processing, the issuing bank clears the instrument in, say, 3–5 business days and funds are credited to Vendor Ltd.’s account.
5. If the DD is lost in transit, you contact the issuing bank immediately with the receipt and serial number to begin a stop/reissue or claim process; bank requirements and any indemnity or cancellation fees will apply.
Practical tips
– Get and keep the receipt and serial number from the issuing bank until the payee confirms funds have cleared.
– Specify the exact payee name and check it against identity documents to avoid rejection.
– For high‑value DDs, consider using insured courier services and confirm bank procedures for lost instruments before sending.
– Ask the bank about the cancellation process and timelines before you request the draft.
Sources for further reading
– Investopedia — Demand Draft: https
https://www.investopedia.com/terms/d/demanddraft.asp
Other reputable sources
– MoneyHelper (UK) — Banker’s drafts: https://www.moneyhelper.org.uk/en/everyday-money/banking/bankers-drafts
– Federal Reserve — Check Services (background on how paper-based instruments clear in the U.S.): https://www.frbservices.org/operations/financial-services/check/index.html
– Reserve Bank of India — Payments and settlement systems (regulatory context relevant where “demand draft” is commonly used): https://www.rbi.org.in
Quick checklist — before you ask for or accept a demand draft
1. Confirm terminology and instrument type (demand draft vs cashier’s check vs banker’s draft) with the issuing bank.
2. Provide the exact payee name as it should appear on the draft. Spell and verify ID.
3. Get and keep the receipt that includes the draft serial/number, issue date, and amount.
4. Ask the bank: fee schedule, expected clearing time, stop/reissue/cancellation process, and required indemnities for lost drafts.
5. For mail or courier: use tracked/insured delivery for high amounts; note bank requirements for presenting the physical instrument.
6. When receiving: compare the serial number on the draft with the receipt and wait for funds to clear before releasing goods/services.
Step-by-step procedure if a draft is lost, stolen, or appears suspicious
1. Immediate notification: call the issuing branch and provide your receipt/serial number and the date of issue.
2. Bank verification: bank will check its records and may place a stop or start a reissue process.
3. Formal documentation: you will likely need to complete a written application for stop payment and possibly an indemnity or affidavit.
4. Police report: some banks require a filed FIR/police report for stolen instruments—get a copy if applicable.
5. Indemnity/cancellation period: the bank may require an indemnity bond and wait a statutory period before reissuing or cancelling; fees may apply.
6. Reissue or settlement: once bank procedures are complete, they will either reissue the draft or, if funds were already paid to a presenting bank, advise on the recovery process.
Worked numeric example (illustrative only)
– Situation: You need to pay a supplier 50,000 (local currency). The issuing bank charges a fee of 0.25% of the draft amount, minimum fee 100, maximum fee 500.
– Calculation: 50,000 × 0.0025 = 125. That’s above the minimum and below the maximum, so the fee = 125.
– Total debited from your account = 50,125.
– Clearing expectation (bank estimate): local in-branch presentation 2–5 business days; out-of-area or international clearing may take longer. These figures are illustrative—confirm with your bank.
Common pitfalls and how to avoid them
– Mistyped payee name: request correction immediately; otherwise the drawee bank may refuse payment.
– Sending the draft by standard mail: use tracked or insured courier for valuable drafts.
– Assuming immediate funds availability: depending on clearing rules, the payee’s bank may place a holding period—confirm typical clearing times.
– Not keeping the receipt or serial number: without it, stop/reissue or trace actions are far harder.
When to prefer alternatives
– If counterparty requires immediate, irrevocable funds, a cashier’s check or certified bank transfer (wire/RTGS/ACH depending on jurisdiction) may be preferable.
– For very large transfers, use a bank wire with contractual confirmations and SWIFT messaging rather than a physical draft.
Educational disclaimer
This information is educational only and not personalized financial advice. Bank procedures, fees, and legal requirements for demand drafts vary by country and institution. Check with the issuing bank and relevant regulators before acting.