Demand drafts are used when payments have to be made to far away places and the payee insists on certainty of the payment. DDs are cheques issued by one branch of the bank and is payable at another branch of the same bank. At times, banks, which do not have many branches, arrange with other banks to issue DDs on their branches by entering into correspondent relationship with them.
Banks earn a fee on DDs in addition to enjoying cost free float funds before the DDs are encashed at the drawee’s branch.
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