Demand drafts are used when one person wants to send or transfer money (remit) to another person who is in another city. The person wanting to send money deposits cash in a bank or issue a cheque in favor of the issuing bank, which issues him a demand draft. The demand draft is sent to the person who is to receive the money. The receiver gives it to the branch/bank where he holds an account and receives the payment. Banks normally charge a commission for issuing demand drafts. It is a method used by an individual for making a transfer payment from one bank account to another. It cannot be paid to the bearer but the beneficiary has to present the instrument directly to the branch.
Payment orders or Banker’s Cheques are similar to demand drafts but are usually issued for payments within a city. These are usually valid for a shorter period of time compared to other instruments. Banks may charge a commission for issuing Payment Orders and Banker’s Cheques. The cheque is basically, an instrument, which contains an order to the bank to pay the particular amount from the drawer’s account to the holder of the instrument. On the other hand, the demand draft is a financial instrument that is payable on demand. The demand draft is made payable on a specified branch of a bank at a specified center.
A demand draft is a transferable instrument issued by the bank. The meaning of negotiable instrument is that it guarantees an assured amount of payment mentioning the name of the payee. It cannot be transferred to another person in any condition.