Saturday, August 22, 2009

Kinds of Credit Instruments

Some of the important and country used credit instruments are discussed here in brief.
1. Cheque: A cheque is defined by Section 6 of the Negotiable Instrument Act as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. In other words it is a bill of exchange drawn on a banker which is payable on demand.
2. Bills of Exchange: A bill of exchange has been defined under section 5 of the Negotiable Instrument Act as “an instrument in writing containing an unconditional order, signed by the banker directing a certain person to pay certain sum of money, only to or to the order of the certain person or to the bearer of instrument. A bill of exchange may be (a) inland (b) external or foreign bill. The former bill is a bill which is payable in Pakistan. The latter means a bill payable either to foreigner or by foreigner.
It is very important instrument. Without making actual payment, goods can be purchased. Secondly in foreign trade, it enables an exporter to get value for his export in his own currency. Thirdly it saves cost of transporating precious metals, only the different being transferred.
3. Promissory Note: A promissory note is defined by Section 4 of the Negotiable Instrument Act as “an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker to pay a certain person or to the bearer of the instrument”.
Promissory notes are commonly used and these may be termed as credit instrument A businessmen borrowing from a bank customarily gives the bank such a note. Sellers of goods and services may accept such a note instead of cash Individuals who borrow for person needs usually give promissory notes to tenders.
4. Drafts: These are bills of exchange issued by a banker on his branch office. Same rules are applicable as are applicable to the cheques. Bank drafts like bills of exchange are of great in pretence in the financing of trade, especially foreign trade.
5. Hundies: These are bills of exchange in Vernacular Language, which have been in common use in our country for purpose of business from at least the 10th century A.D and which have been recognised by law as valid and effective negotiable instrument.
6. Letters of Credit: IT is a letter written by one person or bank to another requesting the latter to pay any amount of money up to certain limit to the person named in the letter or in whose favour the letter is written. In this letter generally a date is fixed up to which only advances should be made by the addresses. Thus a letter of credit remains in force up to a certain date only. Generally these letters are issued by banks.
7. Circular Letters of Credit: This letter is different from the letter of credit for it is addressed to several branches of the issuing banker. The amount of credit can be taken in cash or against bill of exchange drawn, which depends upon the condition of letter. The addresses are required to inscribe on the bank of the letter all advances that they make.
8. Travellers Cheque: Such cheques are very useful to tourists or travellers, for against delivery of these, holders can obtain funds from any branch. Every cheque is of a fixed amount already printed on it. The cheque form has a place where the grantee has to sign in the presence of the payee banks. When these cheques are granted by issuing banker, the grantee is asked to sign all these cheques in his presence. This enables the paying banker to compare the signatures and ascertain that the payment is made to the sight person.
9. Treasury Bills: In sub-continent, for the first time, these bills were issued by the Government on 5 November 1790 to raise money for war purposes and are issued even now. Then they were made also legal tender for all payments to the Government.
10. Book Credit: Book credit are effected when a tradesman sells on credit or a bank advances money, the sale or advance being entered into the account books for the tradesman or of the bankers.

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