Definition
A drawee is a financial term used to describe the party that has been directed by the depositor to pay a certain sum of money to the person presenting the check or draft. It is often a bank or other financial institution where the depositor has an account. In other words, the drawee is the entity that is expected to pay the amount indicated on a financial instrument, such as a check or draft.
Phonetic
The phonetic pronunciation of the keyword “Drawee” is “Drah-wee”.
Key Takeaways
- Role in Draft Transactions: A drawee is a bank or other financial institution that reviews and pays a draft on behalf of their customer. The drawee is an essential role player in draft transactions.
- Payment Responsibility: The drawee is responsible for ensuring that the drawer (the entity that created the draft) has the necessary funds in their account to cover the draft amount. If the funds are sufficient, the drawee will pay the mentioned amount to the payee.
- Relationship with Drawer and Payee: As the party that holds the money for the drawer, the drawee’s responsibilities lie in maintaining a good balance and relationship between itself, the drawer (its client), and the payee to ensure a smooth financial transaction.
Importance
The business/finance term “Drawee” refers to the individual or entity (typically a bank), upon whom a draft (like a check) is drawn, and who is ordered by the drafter to pay a specified sum of money to the payee. The term is important in the realm of business and finance because it signifies who is responsible for the release of funds in a financial transaction, thereby acting as a safeguard for fund transfer. For example, if a check is issued, the bank acts as the drawee and is obligated to pay the specified amount to the bearer on demand. Therefore, understanding the concept of drawee aids in avoiding potential confusion or dispute regarding who is liable to pay in financial transactions such as bill of exchange.
Explanation
The drawee is an integral part of trade and commerce, and it plays a significant role in the functioning of financial transactions, specifically in the realm of bills of exchange and cheques. Its primary purpose is to provide a guarantee in a monetary transaction, such as when a person is drawing a cheque or drafting a bill of exchange. In these cases, the drawee, commonly a bank, is the entity directed to pay a certain sum of money to the person named as the beneficiary or to the person who presents the draft. Essentially, it works as a safety mechanism enabling smooth and risk-free transactions.Furthermore, the drawee’s role aids in facilitating financial operations between different parties, often geographically distant. Here’s an example: assume a person from the United States requests a drawee in India to pay a certain amount to a third party in England. This transaction is enabled by the trust placed by the drawer (the person who wrote the cheque or draft) in the drawee to honor the payment. Within such economic exchanges, the drawee essentially becomes a crucial player that aids international business operations and trade. Regardless of the payment’s purpose, the drawee’s duty in such cases remains the same – to ensure timely and accurate payment as instructed.
Examples
1. Bank Checks: In the case of a bank check, a common example, the individual or entity who has issued the check is the drawer. The bank or the financial institution from which the funds are to be withdrawn is the drawee. For instance, if you have issued a check from your Bank of America savings account, Bank of America is the drawee.2. Commercial Businesses: Often times, invoices or bills are made out requiring payment at a future date. In such a situation, the buyer who is expected to make the payment in the future becomes the drawee. Suppose, a merchandise retailer buys goods from a wholesaler on credit and the wholesaler issues an invoice or a draft with the payment terms, the retailer is the drawee in this scenario, who is expected to pay that amount at the given future date.3. Letter of Credit: In international trade, a letter of credit involves Drawee. The importer’s bank (Drawer) might issue a letter of credit to the exporter (beneficiary) where the issuing bank promises to pay the exporter upon the fulfillment of terms and conditions stated in the Letter of Credit. Here, a third bank (nominated bank by the issuing bank) might act as the drawee, which is obligated to pay the amount to the beneficiary upon presentation of required documents by the beneficiary.
Frequently Asked Questions(FAQ)
What is a Drawee in finance and business?
A Drawee is essentially a party — usually a bank or other financial institution — that is instructed by a business entity to pay a certain sum of money to a specified person or organization. This instruction usually comes in the form of a bill of exchange or a draft.
What is the role of a Drawee in a commercial transaction?
The primary role of a Drawee is to provide the liquidity or funds in a transaction when presented with a demand for payment. This could be for a cheque, draft, or a bill of exchange.
Is the Drawee the same as the payee?
No, the Drawee is not the same as the payee. The Drawee is the party instructed to pay, while the payee is the party that receives the payment.
What happens if a Drawee refuses to pay?
If a Drawee refuses to honor the payment instruction, this is typically referred to as a dishonor. Consequences vary depending on the terms of the transaction, but it often leads to legal action or penalties.
Who is Involved in a transaction that includes a Drawee?
In a typical transaction involving a Drawee, there are usually three parties: the Drawer (the party issuing the payment order), the Drawee (the party instructed to make the payment, typically a bank), and the payee (the party receiving the payment).
Does the Drawee have to be a bank?
While the Drawee is commonly a bank or financial institution, it doesn’t strictly have to be. The Drawee can be any party specified by the drawer who is responsible for making the payment when presented with the appropriate payment order.
What risk is associated with the Drawee?
The main risk associated with the Drawee is the risk of non-payment or default. The Drawee may refuse to honor the payment instruction due to insufficient funds, forgery, or other reasons. The drawer or payee typically bear this risk.
Related Finance Terms
- Drawer: This is the individual or entity that issues a draft (like a check or a negotiable instrument) and orders the drawee to pay a specific party.
- Payee: This is the person or entity who is to receive the funds that are released by the drawee. They are typically the beneficiary of a transaction.
- Bill of Exchange: This is a written order from one party (drawer) to another (drawee) to pay a specified sum either immediately (on demand) or at a fixed or determinable future date.
- Negotiable Instrument: This refers to documents guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payee is named on the document.
- Dishonor: This occurs when the drawee fails or refuses to fulfill the payment obligations for the transaction. This may happen due to insufficient funds or because the order to pay is not valid.
