What is bank draft & how does it work?

3 min read Apr 10, 2024

Many educational institutes, businesses, and government agencies insist on a Bank Draft as a form of payment. Bank Drafts or Demand Drafts (DDs) have been a fundamental part of India's banking system for many years, providing a secure and widely accepted method for making payments. If you're wondering, 'what is a Bank Draft?', continue reading to learn more.

What is a Bank Draft?

Bank Draft is a prepaid negotiable instrument that is drawn for a specific amount by the drawee and presented for collection by the payee at their bank. It resembles a physical cheque and has a 3-month validity.

A Bank Draft provides a secure payment method because the bank verifies the funds before issuing it. This guarantees payment for the recipient, who can then deposit the Demand Draft to access the funds. Essentially, it's like instructing the bank to write a check on your behalf using the funds you've already deposited with them.

How does a Bank Draft work?

Now that you know the meaning of a Bank Draft or Demand Draft, let's understand how it operates. Suppose you want to pay college fees with a Bank Draft. You need to place a request with your bank to create a Bank Draft. You need to share details, like the amount and the payee's name, with a cheque for the amount. The bank will make the debit, create the DD, print it, and have bank officials sign it. Your DD is now ready. When you submit the DD for fee payment, the college will deposit it with their bank. The amount will get cleared in 2-3 working days if everything is in order.

How can you get a Bank Draft?

Offline

Step 1: Visit your bank branch and request a DD form. Fill in the details and sign the form.

Step 2: Submit the filled form at the counter designated for DD issuance.

Step 3: Make the payment through cash, cheque or direct debit from your account.

Online

Step 1: Visit your bank's official website and log into your NetBanking account.

Step 2: Click on 'Service' on the upper right of the menu. In the drop-down menu, select 'Request for' and then click on 'Demand Draft'.

Step 3: Select the debit account and enter the amount, name of the beneficiary, and the city where the DD should be paid.

Step 4: Select the dispatch mode by the bank or courier. Then, click on 'Proceed'. Once the DD is generated, it is usually dispatched to you within 2 days.

Advantages of using a Bank Draft

• Guaranteed availability of funds: Since funds are deposited with the bank before issuing the draft, you can be assured of payment. This is beneficial for large transactions or when dealing with unfamiliar parties.
• Convenience: You can easily obtain them from banks and use them to make payments, settle bills or conduct transactions. You can also request a DD online. Axis Bank offers this facility through Internet banking and couriers the DD within 2 working days.
• Cross-border transactions: Bank Drafts offer a secure and regulated method for international payments without the need for currency conversions or dealing with foreign exchange risks.

Disadvantages of a Bank Draft

• No cancellation after deposit: Once you have handed over the DD, it is not possible to cancel it. Unlike a cheque, where you can stop payment if it's lost or stolen, you cannot stop payment on a Demand Draft.
• Subject to fraud: Fake or counterfeit Bank Drafts can be produced, leading to financial loss for the recipient. It's essential to verify the authenticity of the Bank Draft before accepting it as payment.

Can a Bank Draft be cancelled?

The drawee bank can cancel a Bank Draft if it has not been cleared and paid to the beneficiary. You have to submit the DD to your bank, along with a request letter for cancellation, duly signed. The bank will check if everything is in order and proceed with the cancellation. You will receive the money back into your account after the deduction of cancellation charges.

What to consider before getting a Bank Draft?

• Evaluate all kinds of fees associated with the DD, such as issuance charges and any other additional fees.
• If time is a crucial factor, check how much time the DD will take to process and transfer the money.
• Once your Bank Draft is ready, ensure it is kept safe. It should be handed over to the beneficiary and presented on time as it is valid only for 3 months.

Also Read: Complete Guide on Digital Banking

Summing it up

A Demand Draft, also referred to as a Bank Draft, is a crucial payment transfer method valued for its security and dependability. Serving as a prepaid instrument, it requires the payer to deposit the specified amount with the bank before issuance. Due to these attributes, Demand Drafts are widely accepted, providing a trusted means for transferring funds securely.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.