Cheque vs. Demand Draft: Differences | Types | Contents | Examples

Thanks to the internet and digitisation, everything in the modern world—from payments to financial operations—is now digital. The banking industry and people’s payment habits have both been impacted by this. People prefer cashless transactions, and most banking procedures are now paperless. There are still a few non-digital objects that are still significant in our highly advanced digital society. The two of these tools are demand drafts and checks.

Both instruments are frequently employed in routine banking transactions. However, the majority of individuals are unaware of the distinction between a demand draft and a cheque. Simply put, the main distinction between a demand draft and a cheque is that a draft is issued by the bank, whilst a cheque is issued by the account holder. Here, both subjects are thoroughly discussed.

What is a Cheque?

The financial instrument used to pay a party is referred to as a cheque or check. It is drawn on a specific banker and isn’t specifically stated to be due in any other way than on demand. The payee or holder of the instrument must give it to the bank for payment. It only lasts for three months.

Always keep in mind that a cheque does not always indicate cash because it does not imply payment assurance. Proceeds cannot be realized should the cheque is not brought before the bank within a reasonable amount of time. Furthermore, the payment of the check is contingent upon there being cheque in the account. The cheque will not be honored if there are insufficient funds in the account.

Specimen of Cheque

Specimen of Cheque
Specimen of Cheque

Why is a cheque considered a negotiable instrument?

Because it can be used to exchange for cash, the cheque is referred to as a negotiable instrument. Additionally, it is negotiable by endorsement and paid on demand. Additionally, a cheque that is payable to the bearer can be exchanged by simple hand delivery.

Cheque Parties

The check is signed by three parties:

Parties to Cheque
Parties to Cheque

Parties of a Cheque:

  • Payee: The person to whom the check is payable is the one whose name is inscribed on it.
  • Drawer: The individual who issued and signed the cheque, or the owner of the current account.
  • Drawee: The bank where the funds are withdrawn.

It should be remembered that the drawer and payee of the checks are two different people when the payment is to be made to a third party. However, when a cheque is drawn on “Self,” both the drawer and the payee are the same individual.

What is a Demand Draft?

A demand draft, also known as a DD, is a type of prepaid financial instrument in which the drawee bank agrees to make the full payment whenever the payee presents the DD to the bank for settlement. It is given by the bank to the recipient in order to transfer money from one bank branch outside of the city to another.

The drawee bank acts as a guarantor in this situation by guaranteeing the release of payment upon presentation of the document or by obtaining the funds from his or her bank through a clearing mechanism.

Additionally, in order to obtain a demand draft, a person does not need to maintain a bank account; rather, anyone can fill out the form and pay the associated fees using cash or a cheque. DDs are typically used for making payments that can be cleared at any branch of the same bank but must be made in a different city.

Specimen of Demand Draft

demand draft comp
demand draft

Features of demand draft:

  • DD is payable on demand.
  • It is an unconditional order for payment.
  • It bears no stamp.
  • The draft can be negotiated by endorsement and delivery.
  • The purchaser of the DD need not be a customer of a bank.
  • DD is drawn by a banker on its branch or upon another bank.
  • DD is not payable to bearer.

Parties to Demand Draft

There are two parties engaged in a demand draft, as described as follows:

  • Drawer: Bank or any financial institution,
  • Payee: Party to whom the amount is transferred.

In a demand draft, the drawer and drawee are essentially two separate branches of the same bank, but the payee is the recipient of the payment.

Key Differences

Read the following to get a greater understanding of the distinctions between a demand draft and a cheque:

  • The cheque is a negotiable financial instrument that contains a request to the bank to pay the stated amount to the bearer or to the person whose name is listed on the document. A demand draft, on the other hand, is a pre-paid instrument that the bank issues in the name of a certain person or business to move money from one location to another.
  • Both a demand draft and a cheque contain an instruction to cheque, but in the case of a demand draft, the bank branch rather than the account holder issuing the demand draft directs another branch of the same bank located in a different city to pay.
  • When using a cheque, the payment may be made to the order, or the person whose name is on the cheque, or to the bearer, or the person who hands the cheque to the bank. A demand draft, on the other hand, is paid to the person or organization whose name is written on its face upon demand, as the name implies.
  • A demand draft is issued by the bank to the applicant in favor of another person or entity as opposed to a cheque, which is written by the bank’s customer.
  • The bank does not charge a fee when a cheque is paid, but it does charge a fee when a demand draft is issued.
  • When writing a cheque, the drawer is the bank’s client; when writing a demand draft, the drawer is the bank.
  • A cheque must be signed by the issuer, who may be an individual or a company representative with signing authority. A demand draft, on the other hand, carries the bank’s rubber stamp as well as the authorized officer’s seal and signature.
  • A demand draft only involves 2 parties, but a cheque involves 3 parties.
  • A cheque might be returned for a variety of reasons, including a lack of funds or other factors of a like nature. Demand drafts, on the other hand, cannot be returned because they are paid in advance.

Essential characteristics of a cheque

If one carefully examines the definition of a cheque, it is evident that a cheque possesses the ten following crucial features or characteristics.

  • It must be in writing. A cheque must be written down. An oral request for cheque does not qualify as a check.
  • It should be drawn on banker. Always, it is derived from a particular banker. A cheque can be drawn on any bank, saving or current account, where the drawer has an account.
  • It contains a mandate to pay in full. A cheque cannot be drawn to be conditionally payable. The instruction of the drawer to the drawee bank shall be unconditional and shall not subject the payment of the cheque to any condition. A conditional cheque must be discarded.
  • The check must have a payment order for a certain amount. A request to only pay a specific amount of money should be included on the cheque. A cheque cannot be considered a cheque if it is drawn for a purpose other than paying money. For instance, a cheque that reads, “Pay USD 500 and a TV worth USD 500 to A,” is not a cheque.
  • It must be dated and have the drawer’s signature. Without the original drawer’s signature, a cheque is invalid. It ought to have a date as well.
  • It is payable on demand. Always payable upon demand, a cheque.
  • Validity. Normally, a cheque is good for six months from the date printed on it. After that, it is known as a stale cheque. A cheque that has been dated in the future or in the past is valid. In all situations, the cheque’s validity is assumed to begin on the date that is written there.
  • It may be payable to the drawer himself. Cheques may be made out to the drawer personally. In contrast to a bill or a pro-note, it can be drawn payable to the bearer on demand.
  • Banker is liable only to the drawer. Only the drawer will be held accountable by the banker on whom the cheque is drawn. If a cheque is returned unpaid, the holder or bearer has no recourse against the banker.
  • It doesn’t need to be approved or stamped. A cheque does not need to be accepted by the drawee, unlike a bill of exchange. However, it is common practice among banks to stamp checks as “good” in order to clear them. However, this marking does not imply approval. In a similar vein, checks do not need to have a revenue stamp attached.

Essential characteristics of a Demand Draft

A demand draft contains the following details:

  • Issuing Date
  • Issuing bank and branch name
  • Recipient’s name in whose favour the DD is prepared
  • MICR Code of the bank
  • DD Number
  • Amount payable in words and digits
  • Bank name, with the city where it is payable.
  • Signature of the authorized signatory and branch manager

Conclusion

Demand drafts and cheque each have their own purposes and restrictions. One might take advantage of the advantages of a cheque, which is simple and practical to issue, to deal with millions of transactions on a regular basis. Demand drafts, on the other hand, are the best choice when money needs to be transferred between locations or when a guaranteed payment is needed.