Bank Draft

Definition of Bank Draft

Bank draft defines as a secure payment instrument issued by a bank on behalf of a customer, guaranteeing the transfer of funds to a specified recipient. It functions as a prepaid check, ensuring the availability of funds by withdrawing the amount from the customer's account upon issuance.

Bank drafts provide a reliable way to make large payments, especially for transactions involving international or cross-border payments, as they offer a level of assurance to the recipient that the payment is backed by the issuing bank.

What is Bank Draft?

A bank draft is a form of payment where a bank acts as an intermediary to facilitate the transfer of funds. It involves a payer requesting the bank to create a draft in favor of a payee, ensuring that the funds are secure and available.

The bank deducts the draft amount from the payer's account and issues the draft, often used for transactions requiring a higher level of security or for international payments.

Bank drafts are commonly used for settling bills, making payments to creditors, or purchasing goods and services.

Types of Bank Draft

Bank drafts come in different forms, each serving specific purposes and catering to various transaction scenarios:

Demand Draft

This is the most common type of bank draft, often used for domestic transactions. It's payable on demand, meaning the recipient can present it to their bank for immediate payment.

Telegraphic Transfer (TT)

Also known as a wire transfer, it's a type of bank draft used for fast and secure international payments. The bank electronically transfers funds to the recipient's bank, allowing quick cross-border transactions.

Cashier's Check

Issued by the bank itself, this type of bank draft is drawn from the bank's own funds and is considered a secure form of payment. It's often used for larger transactions.

Traveler's Cheque

While not a traditional bank draft, it's a type of prepaid instrument issued by financial institutions. Traveler's cheques can be used for making payments or obtaining local currency while traveling.

Money Order

Similar to a bank draft, a money order is a prepaid payment instrument issued by financial institutions or postal services. It's often used for smaller transactions and is suitable for those without a bank account.

Certified Check

A certified check is a personal check that the bank guarantees by setting aside the necessary funds. It's suitable for individuals who want assurance that the funds are available.

International Money Order

Used for sending money across borders, this type of bank draft is suitable for smaller international payments and is often issued by postal authorities.