According to Section 131A of the Negotiable Instrument Act-1881, the Drafts are at par with the cheques in case of crossing. It means that Draft is similar to a cheque for the purposes of crossing. Despite that, the following are the differences between the two.

1. A Draft is always payable to the 'order' while a cheque may be payable to the bearer.
2. The payment of Draft cannot be stopped (countermanded) except in cases where the draft is reported lost.
3. In case of a cheque, the drawer can get payment of a cheque stopped, if he so likes.
4. The banker has a direct liability to pay a Draft because purchaser of the Draft has already paid the money to the drawer bank and there is a clear direction from drawer branch to the drawee branch for payment of the money to the payee named therein or crediting to his order.
5. The banker has indirect liability in case of a cheque while the primary liability lies with the drawer of the cheque. The banker will make payment of the cheque only when it has sufficient funds of the drawer with it for payment and the cheque is otherwise in order.

Section 85 A of the Negotiable Instrument Act- 1881 defines a Draft as: "an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand". If the definition is carefully analyzed, the following will emerge as the essential features of a Bank Draft:

1. It is drawn by one office of a bank upon another office of the same bank;
2. It is payable on demand; and
3. Its payment has to be made to the person whose name is mentioned therein or according to his order.

It may be mentioned here that Drafts are not payable to bearer. Once these are issued by banks, the remitter or in other words, the purchaser of the draft/ceases to be any party to the instrument. Instead there remains three parties to the instrument.These are: (a) Drawer branch (b) Drawee branch and (c) Payee.

According to Section-13 of the Negotiable Instruments Act-1881, negotiable instruments include only three instruments namely, (a) Promissory Note, (b) Bill of Exchange and (c) Cheque. Since Bank Draft is not included in this list, controversy arose as to whether Drafts are negotiable instruments or not despite the fact that Drafts are equivalent to Bill of Exchange. 

Various court decisions or judgements made it clear that the Drafts are Bill of Exchange. For example, mention may be made about the Allahabad High Court case (S.N. Shukla Vs The Punjab National Bank Limited) and Calcutta High Court case (State Bank of India and another Vs Jyoti Ranjan Mazumder). Both these courts held that the Drafts are Bill of Exchange. If Drafts are Bill of Exchange, as per court judgement, it needs no mention that they are also negotiable instruments.

Not only the court judgements, Negotiable Instruments Act-1881 itself clarified the position by two subsequent amendments - one in 1930 and another in 1947. The amendment made in 1930 by Section 85A states that where any drat, that is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharges by payment in due course.

On the other hand, amendment made in 1947 by Section - 131 A states that the special provisions relating to cheque that is provisions relating to crossing of cheques shall also apply to any drafts, as defined in section-85 A, as if the draft were a cheques. Based on these two amendments, it is argued by all authors including M.L. Tannan that Drafts are negotiable instruments since protection to the paying and collecting banker in case of crossed cheques is also applicable to the Drafts.

In case of day to day transactions everybody prefers payment in cash. Usually clients use cheques to withdraw money from bank. But there are some limitations in payment using cheques. It may be countermanded (stopping payment) by the drawer or dishonored by the banks. Under this circumstances, Bank Drafts - also called Demand Draft - are the best alternative to cash because these are equivalent to cash. Payment in Drafts are free from any ambiguity. Once the Drafts are issued, the purchaser no longer remains any party to the instrumens. Neither the payment of Drafts can be countermanded (stopped) by the purchaser nor the banks can refuse the payment. Because of these advantages, Demand Drafts are widely used by the business and no-business people to simultaneously avoid ambiguity in payment and hazards of cash remittance. 

 

Business, industry and the members of public are in frequent need of remitting fund from one place to another for various purposes. Banks serve as the best medium for such remittance since they have their branches throughout the country and even abroad. Such facility is available to the customers of a bank as well as non-customers. In fact his is the third major the first two being deposit and advances - area of operation of a bank.

Remittance of funds through banks eliminates the hazards in trasportation of cash from one place to another for settling trade and private dues. On deposit of requisite funds and payment of the reqired charges, a bank undertake to make the remitted amount available to a particular person or his order in a particular branch of the same bank or on other banks with which it may have agency arrangement.

It is needless to say that bank's remittance facility is a powerful alternative to the money order facilities provided by the postal department of our country.

Methods of Remittance

Various methods have been evolved by the banks for remittance of funds from one place to another. Generally such remittance is effected by  the banks in three ways, namely: (a) Banker's Draft or Demand Draft (DD) (b) Mail Transfer (MT) and (c) Telegraphic Transfer (TT).

How does Clearing House operate?

Mechanism of operation of the clearing house is by now an well developed one. Generally the mechanism is as under:

1. Every member bank of the clearing house prepares a bank-wise list of cheques and drafts received from its customers and drawn on different banks.
2. Representative of each bank visits the clearing house with the cheques and their list in the morning and delivers the cheques and drafts to the representatives of the respective banks. Similarly, he also receives the cheques drawn on his bank from the representatives of the other banks.
3. The representatives return to their respective banks to meet again in the afternoon to return the dishonored instruments, if any, to the representatives of the respective banks.
4. The representative of each bank cmputes the final balance payable by his bank from other banks after taking into account the various amounts of receipts and payments.
5. The final settlement is effected by the supervisor of the clearing house by debiting or crediting , as the case may be, the accounts of the respective banks as maintained with clearing house.

Clearing house is an arrangement for the banks to mutually settle their claims over each other arising out of deposit transfer from one bank to another by their respective customers. This arrangement is a recent development in banking without which no bank can imagine to function in today's market comprising millions of customers banking with dozens of banks.

It is a common knowledge that every day thousands of cheques and drafts are drawn by the customers. These cheques and drafts are payable at a particular branch of a particular bank. To get payment of such cheques and drafts they can go personally to those branches. But problem arises when people in possession of cheques and drafts drawn on the other banks stay far away. It becomes inconvenient for them to go there. Moreover, it is also time consuming not to speak of cost. 

Under the circumstances, what a customer can do is to just deposit the cheques and drafts drawn on other banks with his own bank. The bank will then collect the proceeds of those instruments on behalf of the customers and credit the customers account with the proceeds. 

For the purpose of collection of cheques and drafts banks have devised a system called 'Clearing House' where all the banks have their accounts. They mutually settle their claims by simple 'debit and credit' to that account without physically transferring any funds. This is a convenient system in the sense that it does neither involve traveling nor cash handling by the customers. Branches of other banks where cheques and drafts are drawn are not to be visited by the customers. Simply by depositing those into their accounts, the customers get those collected by their bankers.

It may, therefore, be said that clearing House is an organization of the banks which settles inter-bank liabilities due to transfer of deposits by the customers from one bank to another.

Now a days this collection service is a very common service rendered by all the banks. Bank may or may not charge any service charge for this service.