If you wish to appear for an IBPS exam, then it is very important that you pay special attention to your banking awareness. You must be acquainted with the terms demand draft or D.D and cheques as these are among the most commonly used terms in the banking world. In this module, we will try to tell you in detail about both these terms along with distinguishing between the two.
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Banking awareness: What is a demand draft?
A demand draft is a negotiable instrument that is very much similar to a bill of exchange. A bank prepares a demand draft and the amount which is specified on the demand draft is deducted from the person’s account who has requested to make the draft. In other words, it is a pre paid instrument in which the amount has already been deducted from the person’s account who has requested to make the draft. In a demand draft, a bank issues a demand draft to a client in which another bank or a bank of its own branch is asked to pay a certain sum to the specified party. It is basically used for transfer of money from one account to another.
The person to whom the demand draft is issued is called the drawer, the other bank which is directed to pay the sum is called drawee and the party to whom the amount is transferred or paid is called the payee.
For example: You run a small business and you bought goods from a person on credit. You go to the bank are request a demand draft to be issued in the creditors name. The bank issues it and after the demand draft is matured, the creditor goes to the bank and collects his money after showing the demand draft from the bank.
What is a Cheque?
Most of you must be familiar with the term “Cheques” and I am sure most of you must also be using them. No words can describe the feeling when you get a cheque and are eager to withdraw it form the bank!
A cheque is an order to the bank to pay a specific sum from one account to another. For example: You went with your family to have dinner at a nearby restaurant and you make the payment in cheque. The restaurant will send a person to the bank where the cheque will be deposited and the amount specified on the cheque will be transferred to the bank account of the restaurant.
Difference between a cheque and demand draft
- First of all, a cheque is issued by a single person whereas in case of a demand draft, it is issued by the bank.
- A cheque is drawn by another person from the bank whereas a demand draft is drawn by the bank or another branch of the same bank.
- A cheque requires the signatures of the drawer whereas in case of a demand draft, the signatures are not required. This is why demand drafts can be misused.
- The Negotiable Instrument Act defines a cheque but it does not define a demand draft.
- The payment of a cheque can be stopped by the drawer (the person who has issued the cheque) but in the case of demand draft, the payment cannot be stopped by the drawer.
- A cheque can be dishonored on account of want of sufficient balance in the account however in the case of demand draft, since it is a pre paid instrument, such dishonor is not possible. Hence, there is greater payment certainty in a demand draft.
As stated earlier, understanding of both these terms is essential for banking awareness. We hope we could help you in understanding the meaning and difference between the two and wish you all the very best for your future endeavors.