A bank draft can be defined as a negotiable instrument similar to bills of exchange, usually, a  payment cheque where issuing bank or another of its branch processes payment on behalf of  their client (drawer) to drawee’s A/c where drawer had already deposited equivalent funds in  issuing bank A/c along with the applicable charges payable. It is also called a banker’s draft or  teller’s cheque. Usually, like any other negotiable instrument, Bank Draft cannot be transferred  in favour of any other person, i.e., it will be payable only in A/c of an entity whose name is  mentioned as drawee initially. 

Following are the basic characteristics are given below: 

  • The amount of money payable by the bank draft remains certain. 
  • Drawn by one branch of a bank on another branch of the same bank, or sometimes it  can also be drawn on another bank also. 
  • The Payee of the draft must be certain. According to section 85A of the negotiable  instrument act 1881, it should be payable to order on demand and not to the bearer. 
  • Like other negotiable instruments, it is also an unconditional instrument that possesses an order to pay. 
  • Easily accessible as by depositing money in the bank, any person can get a bank draft issued. 
  • Banks usually charge the commission on issuing the draft. 

Types of Bank Draft 

  • Money Orders: In this type of bank draft, a specified amount of money is transferred  from one place to another. The banks issue this on behalf of their customers. It is a  financial instrument where the bank takes the responsibility to remit the amount when  the order is presented before them. 
  • Certified Checks: It is a typical type of banker’s cheque in which money is transferred  to the recipient’s bank a/c via a bank for which the bank charges commission. It is the  easiest method of money transfer. 
  • Demand Draft: It is a type of bank draft where the payer and the recipient are not at  the same place. The receiver receives the money once the draft is deposited. In this  method, day to day financial transactions go on. 

Advantages of Bank Draft

  • Beneficial for Large Transactions: It is useful in case of large transactions such  as purchasing a house, car or any valuable items. It is a guaranteed payment tool  and can be drawn for a large sum involved. Hence it is beneficial for the  parties to process a large number of transactions. 
  • Usefulness: It is easy to use and has a high value in the market to settle the  transactions. 
  • Authenticity: Highly authenticated tool as it is non-transferable without required  formalities. There is the least chance for forgeries in bank drafts as the bank issues  it once all the formalities are fulfilled. 
  • Risk: A negligible amount of risk is involved in this type of draft. Security measures  are well established as compared to other means of financial tools. 


Disadvantages of Bank Draft 

  • Time-Consuming: The process is time-consuming as the draft can be taken  through banks only. An individual has to visit the bank and collect the draft  personally. Similarly, the receiver has to present the draft before the bank for  remittance. 
  • Cost: Additional charges and commission of the bank are charged based on the  amount to be transferred. The different banks have different charges depending  upon the number/ value of drafts to be made. 
  • Deadline: Bank has a proper time limit to present the draft before it; if the drafts  are older than the prescribed limit, the bank may refuse the remittance, and then  the refund process also takes time. 

It is one of the payment mechanisms generally used in processing various  government, educational institutions related payments. It is important for the  security measures involved in it as it is authenticated and has the least risk factor.  But as it is not a liquid asset, it has some formalities that make it a bit cumbersome. However, with the philosophy of digitalisation, nowadays, online transactions are  becoming popular.

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