Banking Awareness: Difference between Cheque and Demand Draft

Banking Awareness: Difference between Cheque and Demand Draft

Banking Awareness: Difference between Cheque and Demand Draft

History of Cheques in India  

The cheque was introduced in India by the Bank of Hindustan. In 1881, the Negotiable Instrument Act was enacted in India. The NI act provides a legal framework for non-cash payment instruments in India. Until 1 April 2012, cheques in India were valid for six months from the date of their issue, but now RBI issued a notification reducing their validity to 3 months from the date of issue.

Cheque & Its Types   

A cheque is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The 4 main items on a cheque are : 
  1. Drawer : the person or entity who makes the cheque 
  2. Payee : the recipient of the money. 
  3. Drawee : the bank or other financial institution where the cheque can be presented for payment. 
  4. Amount : the currency amount. 
Important Points to Note
  • In case of dishonour of cheque for insufficiency of funds in an account a court can punish a person for 2 years of imprisonment or with double fine, if cheque issued by drawer returned by the bank unpaid. 
  • Now cheque can be presented in any court if it remains unpaid. It is not necessary to present the cheque in the court of same area where cheque is issued. 

Types of Cheques : 

  1. Bearer cheque : When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. This cheque is payable to the person specified therin or to any other else who presents it to the bank for payment. However such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank. 
  2. Order cheque : When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to specified person after identification therin as the payee, or to anyone else to whom it is endorsed (transferred). 
  3. Uncrossed / Open cheque : When a cheque is not crossed, it is known as an "open cheque" or an "uncrossed cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one. 
  4. Crossed cheque / An account payee cheque : Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& Co." or "account payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account. 
  5. Anti-dated cheque : If a cheque bears a date earlier than the date on which it is presented to the bank, it is called "anti-dated cheque". 
  6. Post-Dated cheque : If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post-dated cheque cannot be honoured earlier than the date on the cheque. 
  7. Stale cheque : If a cheque is presented for payment after three months from the date of issue the cheque, it is called stale cheque. A stale cheque is not honoured by the bank. A self-cheque : It is written by the account holder so pay self to receive money in physical form the bank any where bank has its branch. In a self cheque any person who holds the cheque can withdraw money.

Various Types of Cheques Based on Their Functionality : 

  1. Gift cheque : It is a cheque in decorative form issued for a small extra charge by the banks for use by customers who wish to give presents of money on special occasions to their known. 
  2. Traveller's cheque : It is an instrument issued by a bank for remittance of money from one place to another. Travellers cheques are accepted almost everywhere and are available in many denominations. Plus, the no expiration feature allows you to cash in leftover cheques or retain them for the next time you travel.
  3. Bankers cheque : It is a kind of cheque issued by the bank itself connected to its own funds. 
  4. Local cheque : A local cheque is a type of cheque which is valid in the given city and a given branch in which the issuer has an account and to which it is connected. If a given city's local cheque is presented elsewhere shall attract some fixed banking charges. 
  5. At-Par cheque : It is a cheque which is accepted at par at all its branches across the country. Unlike local cheques it can be presented across the country without attracting additional banking charges.

Demand Draft (DD) 

 A bank issues a demand draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain sum to the specified party. DD can only be payable to a specified party also known as pay to order. DDs are orders of payments by bank to another bank.

Difference between Demand Draft & Cheque


Demand Draft

DD doesn’t require a signature in order to be cashed.
Cheque requires a signature in order to be cashed.
A draft is an order to pay money drawn by one office of a bank upon another office of a the same bank for a sum of money payable to order on demand.
A cheque is an unconditional order directing the banker to pay certain sum of money only to or to the order of a certain person.
Draft is issued to anyone every to non-account holder.
The current a/c and saving a/c holder get a cheque facility.
In case of draft, the drawer is the bank itself.
In case of cheque, the drawer is the customer of the bank.
Bank charges a nominal fee or commission to issue a draft.
Bank may not charge for issuing the chque book.
Draft can never be dishonoured.
Chqeques can be dishonoured for various reasons.
There is no need of clearance if DD is drawn on the same bank.
There is need of clearance.
2 parties involved in draft transaction : Drawer, Payee
3 parties involved in cheque transaction : Drawer, Drawee, Payee

That's all for now friends. 

Happy Reading

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