Cheque vs. Demand Draft

Attribute	Cheque	Demand Draft
Definition	A written order to pay a specified amount of money from one bank account to another.	A prepaid instrument issued by a bank, containing an order to pay a certain amount to the specified beneficiary.
Payment Method	Can be used for both local and international payments.	Primarily used for local payments within the same country.
Issuance	Can be issued by individuals, businesses, or organizations.	Usually issued by banks or financial institutions.
Clearance Time	May take a few days for the funds to be cleared and transferred.	Usually cleared and transferred on the same day or within a shorter timeframe.
Cost	May involve fees or charges for processing and handling.	Typically involves a fixed fee charged by the issuing bank.
Security	Can be lost or stolen, requiring additional precautions.	Relatively more secure as it is issued in favor of a specific beneficiary.
Usage	Commonly used for various types of payments, including personal and business transactions.	Often used for specific purposes like educational fees, government payments, or large transactions.

Introduction

When it comes to making payments, there are various methods available to individuals and businesses. Two commonly used methods are cheques and demand drafts. Both cheques and demand drafts serve as negotiable instruments, allowing the transfer of funds from one party to another. However, they differ in terms of their attributes, usage, and processing. In this article, we will explore the key differences and similarities between cheques and demand drafts.

Definition and Purpose

A cheque is a written order issued by an account holder to their bank, instructing the bank to pay a specific amount of money to the person or entity named on the cheque. It serves as a convenient method for making payments, especially for day-to-day transactions. On the other hand, a demand draft, also known as a banker's draft, is a prepaid instrument issued by a bank on behalf of a customer. It guarantees the payment to the recipient and is often used for larger transactions or when the payee requires immediate payment.

Issuance and Authorization

When it comes to issuing a cheque, the account holder writes the cheque, fills in the payee's name, the amount to be paid, and signs it. The cheque can then be handed over to the payee or deposited into their bank account. On the other hand, a demand draft is issued by the bank itself. The customer provides the necessary details, including the payee's name and the amount to be paid, to the bank. The bank then issues the demand draft, which is typically payable to the payee or their order.

Validity and Expiry

A cheque is generally valid for a period of six months from the date of issue. If the payee fails to deposit the cheque within this timeframe, it becomes stale and may not be honored by the bank. In contrast, a demand draft usually has a longer validity period, often ranging from three to six months. However, it is important to note that the validity period can vary depending on the issuing bank's policies. It is advisable to check with the bank regarding the specific validity period of a demand draft.

Clearance and Processing Time

When a cheque is deposited into the payee's bank account, it undergoes a clearance process. The bank verifies the signature, checks for sufficient funds, and ensures the cheque is not post-dated or stale. This process can take a few days to complete, and the funds are made available to the payee once the cheque clears. On the other hand, a demand draft is considered a more secure form of payment as it is prepaid. The payee can present the demand draft to their bank, and the funds are typically made available immediately or within a shorter processing time compared to cheques.

Cost and Fees

When it comes to costs and fees, there are differences between cheques and demand drafts. Generally, banks do not charge any fees for issuing cheques to their account holders. However, if the account holder exceeds their monthly limit of free cheques, additional charges may apply. On the other hand, demand drafts usually involve a fee charged by the bank for issuing the instrument. The fee amount can vary depending on the bank and the transaction value. It is important to consider these costs when deciding between a cheque and a demand draft for a particular payment.

Security and Risk

Both cheques and demand drafts offer a certain level of security, but they also come with their own risks. Cheques can be risky if they are lost or stolen, as they contain the account holder's signature and bank account details. If a lost or stolen cheque is misused, it can lead to unauthorized transactions and potential financial loss. Demand drafts, on the other hand, are considered more secure as they are prepaid instruments. They do not contain the account holder's personal details, reducing the risk of misuse. However, it is still important to handle demand drafts with care and ensure they are delivered to the intended recipient.

Acceptance and Usage

Cheques are widely accepted as a form of payment, and many businesses and individuals still rely on them for various transactions. However, with the advancement of digital payment methods, the usage of cheques has declined in recent years. On the other hand, demand drafts are commonly used for larger transactions, such as property purchases, educational fees, or international payments. They are often preferred when immediate payment is required or when the payee wants assurance of receiving the funds.

Conclusion

In conclusion, both cheques and demand drafts serve as important payment instruments, each with its own attributes and purposes. Cheques are convenient for day-to-day transactions, while demand drafts are often used for larger payments or when immediate payment is required. Cheques are issued by the account holder, while demand drafts are issued by the bank. Both instruments have their own validity periods, clearance processes, and associated costs. While cheques are widely accepted, demand drafts offer a higher level of security. Ultimately, the choice between a cheque and a demand draft depends on the specific requirements of the transaction and the preferences of the parties involved.