Difference between Cheques Vs Demand Draft

Aspect Cheques Demand Drafts

A demand draft, also known as a
A cheque is a written order from an
banker’s cheque, is a pre-paid
Payment individual (the drawer) to their bank to
instrument issued by a bank on its
Process pay a specific amount to another
own behalf, guaranteeing payment to
individual or entity (the payee).
the recipient.
Cheques can be issued by individuals,
Demand drafts are exclusively issued
Issuer businesses, or other entities from their
by banks themselves.
own bank accounts.
While cheques provide a means of
Demand drafts, on the other hand,
payment, they may not always be
Payment provide a higher level of payment
guaranteed. There is a risk of a cheque
Guarantee guarantee as they are pre-paid
bouncing if the drawer’s account lacks
instruments issued by the bank.
sufficient funds.
Payment confirmation is not guaranteed Demand drafts provide confirmed
Payment
before submission of the cheque. It is payment status before issuance,
Confirmation
subject to the drawer’s account balance. ensuring that funds are available.
A cheque can be stopped or cancelled by Once a demand draft is issued, it
Stopping
the drawer under valid circumstances, cannot be stopped or cancelled by the
Payment
such as loss or error. drawer.
In a cheque transaction, three parties are A demand draft transaction involves
Parties
involved: the drawer (issuer), the drawee two parties: the drawer (bank) and the
Involved
(bank), and the payee (recipient). payee (recipient).
Generally, issuing a cheque does not Banks may charge a fee for issuing a
Additional
involve additional charges, but fees may demand draft, often depending on the
Charges
apply for bounced cheques. draft’s value.
Demand drafts provide higher security
Cheques can be risky if they are not
Security and as they can only be claimed by the
marked “account payee” as anyone can
Risk designated payee, reducing risks of
cash them, posing potential security risks.
unauthorized use.
Cheques may not always be widely
Demand drafts are commonly
Acceptance in accepted in business transactions due to
accepted in business transactions due
Transactions concerns about bouncing and security
to their guaranteed payment status.
risks.
Importance of Banks

Banks provide funds for the business and play an important role in the development of a nation.

1. Acts as an intermediary

It acts as an intermediary between people having surplus money and those requiring money for
various business activities.

2. Economic Development

It helps in national development by providing credit to farmers, small-scale industries and self-
employed people as well as to large business houses which leads to balanced economic
development in the country.

3. Capital Formation:

Deposits accepted by banks are converted into loans and advances for industrial and trading
activities to business organizations. This way, banking converts savings into investment leading
to capital formation and development of economy.

4. Services to Business:

Banking helps business through a variety of services like providing long-term and short-term
finance, arranging remittance of money, collection of cheques and bills etc., helping in raising of
capital by acting as underwriters etc.

5. Reduces Use of Currency:

Banks enable depositors to make payment by cheque, travelers’ cheques, credit cards etc. issued
by banks instead of liquid money. Thus, associated problems of use of currency are considerably
reduced.

6. Mobilization of Savings:

Banks allow savings to be deposited in different types of accounts such as Current Account,
Savings Bank Account, Fixed Deposit Account, etc. carrying different interest rates as their
income which encourage people to save money and put it in the banks.

7. Raising the standard of living

It helps in raising the standard of living of people in general by providing loans for purchase of
consumer durable goods, houses, automobiles, etc.

8.Benefits to Rural Economy:

Rural branches of banks play a useful role in mobilizing savings in rural areas and provide loans
to farmers and artisans at concessional rates and on priority basis. This helps the rural economy.

9. Balanced Regional Development:

Banks identify areas that need special assistance for industrial development and identify
backward regions and help in their economic development by providing them adequate funds at
reasonable rates.

10. Development of Credit Policy:

The central bank of a country develops a proper monetary policy by determining the bank rate
which further affects interest rate and credit policy in the country that ultimately leads to effect
on economic development of the country.

11. Facilitates Foreign trade

It also facilitates import export transactions. Reserve Bank of India regulates all the import and
export transactions and facilitates bringing foreign exchange to be used for country's economic
development.

Primary and Secondary Functions of Banks

Primary Functions
 Accepting Deposits – Commercial banks accept deposits from their customers in the
form of saving, fixed, and current deposits.
 Savings Deposits – Savings deposits allow a customer to credit funds towards their
accounts for up to a certain limit. These deposits are preferred by individuals with a fixed
income, utilized to create savings over time.
 Fixed Deposits – Fixed deposits come with a predetermined lock-in period. Fixed
deposits are also referred to as time deposits as the funds are deposited for a specific time
frame.
 Current Deposits – Current deposits allow account holders to deposit and withdraw
money whenever necessary. In some cases, current accounts also offer overdrafts until a
pre-specified limit to individuals and businesses.
 Providing Loans – One of the main functions of commercial banks is providing credit to
organizations and individuals, and profit from the earned interest. Usually, banks retain a
small reserve for their expenses while offering the remaining amount to customers as
various types of short and long-term credits.
  Credit Creation – A unique function of commercial banks is credit creation. Instead of
offering liquid cash, banks create a line of credit and transfer the loan to a business or
commercial body all at once.

Categories of Secured and Unsecured Loans provided by Commercial Banks

 Cash Credit – Commercial Banks and their Functions include extending advances to
individuals and organizations against bonds, inventories, and other types of securities.
This facility, commonly known as cash credit, provides a more substantial sum when
compared to other forms of credit.
 Short-Term Credits – Short-term loans are usually pledged without any security,
offering a smaller loan amount and repayment tenor. These are also referred to as
personal loans.

Secondary Functions
The following can be considered as the secondary functions of commercial banks –
 Providing locker Facilities – Commercial banks provide locker facilities to customers
who want to store valuables safely. Locker facilities eliminate the impending risk of theft
or loss, which prevail when kept at home.
 Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to
individuals and organizations that export or import goods from overseas. However, only
certain banks which have the license to deal in foreign exchange are eligible for such
transactions.
 Exchange of Securities – Another function of commercial banks is to trade in bonds and
securities. Customers can purchase or sell the units from the financial institution itself,
which offers more convenience than alternate approaches.
 Discounting Bills of Exchange – The main function of a commercial bank in today’s
date is to discount bills of businesses. Bill discounting is considered a profitable
investment for banks. Bills create a steady flow of funds, while not becoming a risky
venture during payment as it is considered as a negotiable instrument. These also do not
involve the financial institution in any litigation.
 Bank as an Agent – Commercial Bank and its Function also require them to provide
finance-related services to customers, fulfilling the role of an agent. These services
usually include –
 Acting as an administrator, trustee, or executor of a customer-owned estate.
 Assisting customers with tax returns, tax refunds, and other similar tasks.
 Serving as a platform to pay premiums, repay loan installments, etc.
 Offering a platform for electronic transaction of funds, processing of cheques,
drafts, bills, etc.
Debit and Credit Card

What is a debit card?

A debit card is a card that is linked with your savings or current bank account. When you open
your bank account, the bank issues a card that you can use at ATMs and PoS terminals to
withdraw money or pay for your expenses, respectively. The sums are automatically and
instantly debited or deducted from your debit card. Banks provide free debit cards and charge a
small annual maintenance fee.

What is a credit card ?

A credit card is another type of bank card through which you can borrow money for a bank or
financial institution. The issuer provides you with a line of credit, also known as a credit limit.
This limit is determined based on your income and can be increased from time to time. The
issuer bills you for your credit card expenses, and you need to pay them off by a stipulated date.
If you fail to repay the sums borrower on credit, the issuer levies an interest rate on the money
borrowed.

Credit card vs debit card

Having explained the meanings of credit and debit cards, let’s find out what is the difference
between credit card and debit card. They are as under:

• Bill vs account statement

People who have a credit card are sent a bill for the expenses incurred on the card each month.
The issuer sends a bill explaining the minimum and total sums due. In the case of debit cards, the
account holder can directly access the savings account to see the expenses incurred.

• Linking the card

The debit card is linked to your savings account, whereas the credit card is linked to the financial
organisation or issuing bank offering the credit facility.

• Credit vs spending limit

Typically, credit card companies provide a credit limit, and you cannot borrow sums exceeding
the credit limit. In the case of debit cards, banks issue daily cash withdrawal as well as PoS
spending limits.

• Interest charged

The credit card issuer levies an interest rate if one is unable to repay the amounts borrowed on
time. However, in the case of debit cards, money is not borrowed on credit, so no interest is
charged.
NEFT, RTGS and IMPS

NEFT, RTGS and IMPS are the most commonly-used methods of online fund transfers in our
country today. While the Reserve Bank of India (RBI) introduced NEFT and RTGS, the National
Payments Corporation of India (NPCI) introduced IMPS.

 NEFT

The full form of NEFT is National Electronic Funds Transfer. It is an online payment system
facilitating one-to-one fund transfers. You can use NEFT to transfer funds electronically from
your bank account to that of another person. But you must remember an important factor- NEFT
transfers don’t occur in real time.

 RTGS

The full form of RTGS is Real-Time Gross Settlement. If you use this online payment system to
transfer money, the amount will get credited to the beneficiary's account in real-time.

 IMPS

The full form of IMPS is Immediate Mobile Payments Services. This online payment system
facilitates inter-bank funds transfer system in real-time. An important factor to note is that you
can use IMPS 24x7 throughout the year, including bank holidays.

Differences between NEFT, RTGS and IMPS

Points of NEFT RTGS IMPS
difference

Full form National Electronic Funds Real-Time Gross Immediate Mobile

Transfer Settlement Payments Services

Fund settlement Half-hourly batches Real-time Real-time

time

Service Available 24x7, 365 days Available 24x7, Available 24x7, 365
availability 365 days days

Payment Online and offline Online and Online

options offline

Process speed Slow Faster Faster

Minimum Re. 1 Rs. 2 lakh Rs. 1
transfer limit

Maximum No limit No limit Rs. 2 lakh

transfer limit (Exception – Rs. 50,000 for cash-
based remittance within India and
Nepal)

Life Insurance Vs General Insurance

Life Insurance General Insurance

Life insurance covers an individual’s

General insurance covers non-life assets,
life and fixed health benefits like
Cover such as houses, vehicles, health, events,
critical illnesses e.g. Cancer, heart
travel, and more.
ailments etc.
In case the insured dies during the
Compensation is paid only if there is
policy term, the nominees receive the
loss or damage to the house or car,
Compensation sum assured. Some plans pay this to
during travel, or in case of
the policyholder if he or she outlives
hospitalisation for medical emergencies.
the policy maturity.
The premium charged depends on many
You pay a fixed premium depending
factors of the asset insured. For e.g.,
on the coverage amount and this does
Premium medical insurance premium will depend
not change during the premium
on medical history, habits, profession,
payment period.
and other lifestyle parameters.
This can be paid annually, half-
Premium The premium has to be usually paid as a
yearly, quarterly, monthly or as a
Payment Term lump sum.
lump sum.
Life insurance policies are long term These are typically annual policies and
policies which can continue for up to can be renewed if required. However,
Tenure
99 years of age, depending on the they must be renewed within the
plan. stipulated time to avoid lapsation.
The sum assured is paid out to the
In general insurance, the payout is called
Repayment policyholder’s nominees, provided
sum insured. This amount is paid out if
Amount all terms and conditions have been
the insured asset is lost or damaged.
complied with.