A Banker’s Draft, commonly referred to in India as a Demand Draft (DD), is a secure financial instrument issued by a bank that guarantees payment to the payee. It is widely used for transactions where assurance of payment is essential, such as educational fees, government transactions, and real estate dealings.
What is a Banker’s Draft?
A Banker’s Draft is a prepaid negotiable instrument drawn by a bank on another bank or its own branch, directing payment of a specified amount to a named payee. Since the amount is paid to the bank beforehand by the drawer, it carries no risk of dishonour due to insufficient funds.
Legal Definition under Indian Law
While the Negotiable Instruments Act, 1881 does not specifically define “Banker’s Draft,” Section 85A provides legal protection for banks honoring demand drafts, making it part of the negotiable instruments framework.
Section 85A: Provides that a banker who pays a demand draft in due course is discharged from liability.
Key Features of a Banker’s Draft
- Issued by a Bank: On request and after payment by the purchaser.
- Prepaid Instrument: The drawer pays the bank upfront, making it more secure than a cheque.
- Non-revocable: Once issued, it cannot be stopped or cancelled by the drawer (except under certain banking policies).
- Payee Specific: Only the named payee can receive payment.
- Legally Enforceable: Treated as a negotiable instrument under the law.
- Widely Accepted: Used in both domestic and international transactions.
Uses of Banker’s Draft in India
- University and College Admission Fees
- Government Applications or Tender Fees
- Payment for Real Estate and Property Deals
- Professional Certifications and Exam Fees
- Security Deposits and Loans
- Business Payments in B2B Transactions
Process to Obtain a Banker’s Draft (Demand Draft)
- Visit your bank or apply online (if supported).
- Fill out the DD application form with:
- Payee’s name
- Amount
- Payable location
- Pay the amount in cash or debit from your account.
- Bank issues a draft drawn on a branch or another bank.
Difference Between Banker’s Draft and Cheque
| Basis | Banker’s Draft | Cheque |
|---|---|---|
| Issuer | Bank | Account holder |
| Payment Guarantee | Yes (prepaid by drawer) | No (depends on account balance) |
| Risk of Dishonour | None | Yes |
| Suitable For | Secure and assured payments | Everyday transactions |
| Stop Payment Option | Usually not allowed | Allowed by drawer |
Legal Protection for Banks: Section 85A of Negotiable Instruments Act
- Protects the bank from liability if it makes payment in good faith and in due course.
- Ensures smooth operation of secure banking instruments like DDs.
- Prevents misuse or false claims by purchasers once the DD is paid.
Can a Banker’s Draft Be Cancelled?
Yes, but under strict conditions:
- Only the purchaser (not the payee) can request cancellation.
- The draft must not have been encashed or lost.
- The bank may levy cancellation charges.
- A written application and original DD must be submitted.
Common Legal Issues Related to Banker’s Drafts
- Forgery or Loss: Banks may require indemnity bonds before reissuing.
- Fraudulent Drafts: RBI and banks have strict verification policies.
- Misuse of DD in Property Transactions: High-value DDs are scrutinized under AML (Anti-Money Laundering) laws.
Recent RBI Guidelines (For Reference)
- RBI guidelines require banks to maintain proper logs of high-value DDs.
- DDs above ₹50,000 should be paid only via account payee cheques or electronic mode.
- Banks must ensure KYC compliance for issuance of DDs.