Pay Order & Demand Draft

Presented By:

Chinar Sehrawat

DEMAND DRAFTS

• Demand draft (also known as DD) is a pre paid negotiable instrument, wherein the bank by whom the demand draft has been made undertakes the responsibility to make full payment whenever the instrument is presented for payment , the beneficiary either has to deposit the same in his bank account or get the same collected through the branch who has made the 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 (payee).

Contd.• While making a demand draft, the bank deducts the

amount from the bank account of the individual who has requested for making demand draft and deposits the same in their own account. And when the DD is presented for clearing, it is the responsibility of the banker to make the payment.

• It is not mandatory that you should a bank account in the bank from where you are preparing the demand drafts. The demand draft can be made by paying the bank in cash as well, but for demand drafts exceeding Rs. 50000 the payment should be by cheque only.

Contd.

• Quoting your PAN No. is also necessary in case the value of DD exceeds more than Rs. 50000.

• A draft is normally prepared in Indian currency i.e. rupees.

• However, in case you are required to make the payment in foreign currency , a draft can be prepared in foreign currency as well. Demand draft is an easy way of sending payments abroad as the risk of non clearance of a demand draft is nil.

Crossed Demand Draft

• In case the demand draft is crossed as accounts payee, it cannot be encashed over the counter from the bank branch and can only be cleared by depositing in the bank account of the person in whose favor the DD has been made.

• The main purpose of crossing a demand draft is to ensure that the payment is cleared by means of an account i.e. the payment is deposited in the bank account of the person in whose favor the DD has been drawn.

Contd.

• If the DD is not crossed, the payment would be made by the bank to the holder of the Instrument after his proper identification. And in case, it is a crossed demand draft, the payment would be made only to the Bank Account of the person.

• RBI in its Notification dated 4th November 2011 has announced that all DD’s exceeding Rs 20,000 mandatorily have to be Crossed.

Demand Draft Charges

• There are no standard charges for making a DD and the Charges usually vary from Bank to Bank and also vary with the value of the Demand Draft.

• The Demand Draft Charges are variable and vary with the value of the Draft. Banks usually charge a variable fee Rs. 1.5 to Rs. 4 per thousand plus Service Tax. However, if the value of Draft is small, they may charge flat fixed charges as well. The charges may be lower in case of Privilege Banking Customers.

Contd.

• In case the Individual on whose request the Demand Draft had been drawn wants to cancel the Draft, he can submit a request for the same along with the Demand Draft to the banker from whom the Draft had been made and the Bank would cancel the DD and pay you the amount of the DD. The Draft Cancellation Charges are usually Rs. 100 to Rs. 300

Contents of DD

1. 01/09/2007:Date on which the DD has been drawn. Prior to 1st April 2012, a draft was valid for 6 months but w.e.f. 1st April 2012, the Validity of DD has been reduced to 3 Months.

2. PIO Ministry of Home Affairs: Name of the Person in whose favour the DD has been drawn

3. New Delhi: Place at which the DD is payable

4. Rs. 10: Amount payable through this DD

5. ICICI Bank, Connaught Place: Name of the Drawee Bank and Branch

6. The Authorised Signatory of the Bank Branch from where the DD has been prepared

7. 367217:DD Number of the Instrument

8. 000229000:MICR Code of the Bank Branch

Difference Between Cheque and Demand Draft

• A Cheque is signed by an Individual and therefore there are chances that the cheque may or may not clear. However, a DD is prepared by the Banker and as it is signed by a banker, the chances of default are not there.

• Demand drafts can only be made payable to a specified party, also known as pay to order. But, cheques can also be made payable to the bearer.

• Demand drafts are orders of payment by a bank to another bank, whereas cheques are orders of payment from an account holder to the bank.

Pay Order

Definition

• Pay order is a document which instruct a bank on behalf of the customer to pay a certain sum to a third party.

• Such orders are normally acknowledged by the bank which provides the guarantee that the payment will be made.

Features of Pay Order

• Pay order are not dishonored as amount is prepaid.

• Once issues, the Pay Order is valid for 3 months.

• Pay Order are “Not Negotiable” instrument.

• These are cleared in any branch of bank in the same city.

• Preferred by schools and colleges.

Specimen of a Pay Order

THANK YOU