Bank Credit

Instruments

Credit Instrument
It is a documents describing
details of credit and debit.
It provide a written means from
future reference describing terms
and conditions of any debt and
loan.

 It may be an order for payment of

money to a specified person or it
may be a promise to pay the loan.
Cheques, bills of exchanges, bank
overdraft, etc. are the credit
instruments that are generally in
use.

Kinds of Credit Instrument

1. NEGOTIABLE INSTRUMENTS
Means a cheque, promissory note and a bill of
exchange which are payable to the bearer of the
instrument or the person to be ordered.

2. NON- NEGOTIABLE INSTRUMENTS

This cannot be transferred or the documents
which are restricted to transfer by the issuer.
Ex: money order, postal order, shares certificate

TYPES OF BANK CREDIT INSTRUMENT

1.Promissory Note
A promissory note is a written
promise from a buyer or a
borrower to pay a certain sum of
money to the creditor or his order.

ADVANTAGES
a) There is tangible proof of the existence of the debt.
b) There is fixed time for payment.
c) Prompt payment can be expected rather than at
the whim of the debtor.
d) It commands a higher as an asset especially for
seeking financial assistance.
e) It gives no opportunity to dispute the quality of
goods purchased upon credit.

DISADVANTAGES
a) The inflexibility of the promissory
note and its convenience of the part
of the debtor has limited its use.
b)The debtor has no choice on
whether to take advantage of cash
discounts or not.

2. Bill of Exchange
Used in internal as well as foreign
trade.
It is an order by a seller to a buyer
or by a creditor to debtor to pay a
certain sum of money to himself or
to bearer or to another person
named:

 Drawer- seller or the creditor

who draws the bill
Drawee- purchaser or the
debtor on whom the bill is
drawn
Payee- the seller may order
the payment to be made to a
third person.

3. Cheques
Most common instrument of credit
and almost works like money.
Written order on a printed form by a
depositor to his bank to pay a sum
of money to himself or to somebody
else, whose name is entered on it.

KINDS OF CHEQUES
1. Bearer Cheque-the bank need not worry as to
who
presents it at the counter.
2. Order Cheque- safer form of payment
-the bank is responsible for paying the
money to the right person.
- the person who presents the cheque
at the counter has to prove his identity,
before the proceeds of the cheque can
be paid to him.

3.Crossed Cheque - safest form of payment

as it cannot be cashed.
4. Post-dated Cheque-way of making the
payments sometime in the future.
-it can be cashed only on or after that
date.
5. Blank Cheque- an unlimited offer because
the signature is put, whereas the space for
the amount is left blank to be filled in by the
drawee.

4. Bank Drafts
It is a cheque drawn by a bank
on its own branch or on
another bank requiring the
latter to pay a specified
amount to the person named
in it or to the order thereof.

Classification of credit
instruments

A.As acceptability (general/limited)

1. Credit instruments of limited
acceptability are those acceptance will
depend on the credit standing of the
issuer or maker.
2. Credit instruments of general
acceptability are those that pass from
hand to hand without question as to
their source and which, in effect possess
the characteristics of money.

B. As to form
1.Promise to pay contains the promise of
one person to pay another a certain
sum of money on demand or at a
future determinable time.
2.Order to pay is the order of one person
to a second person to pay a third
person a certain sum of money on
demand or a future determinable time.

C. As to function
1.Credit money emphasis its use as a
medium of exchange.