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GROUP PROJECT OF
MONEY AND BANKING
SYED SALMAN ABBAS MUHAMMAD UMAR FARRUKH IMTIAZ TOHEED AKRAM GHANI YOUNAS
NEGOTIABLE INSTRUMENTS & LETTER OF CREDIT (L.O.C), IT’S NEED ROLLS AND PROCESSES
DEDICATION We dedicate our Work to our parents who give us hope and opportunities to face the hurdles of life with their assistance. we also dedicate our work to our Teacher who makes us realize to perform our best in life to make an example for our followers .
Who gave us an opportunity to explore our knowledge by experience the actual Money and banking environment closely. . We also would like to give our especial thanks to our Parents who help us a lot in every field of our life.ACKNOWLEDGEMENT We are deeply thankful to our Teacher. Sir Faisal Siddique.
.........................................TABLE OF CONTENTS Main page.......................................................................................................................................................................5 Letter of Credit...........................................................................................................................…...................................12 ....................................................................................................................................4 Negotiable Instruments.............................................................................................................................................2 Acknowledgement...............3 Table of contents..................8 Teacher’s Comments.........1 Dedication.....
who is known as a holder in due course. if there are more parts thereof than one upon one of such parts and delivered the same or given notice of such signing to the holder or to some person on his behalf. The party who is called on to make payment is known as the drawee. checks. Negotiable instruments may be transferred from one person to another. the person thereby directed to pay is called the drawee. called a promissory note. Upon transfer. or. Drawer & Drawee The maker of a bill of exchange or cheque is called the "drawer". involves only two parties. such person is called a drawee in case of need. called a bill of exchange. or the party to whom the note is payable. Negotiable instruments may be transferred by delivery or by endorsement and delivery. Cheque: A check is an example of a bill of exchange. Bills of exchange. the maker promises to pay a certain amount to the payee. involves three parties. and certificates of deposit are all examples of negotiable instruments. With a promissory note. and the party to whom payment is to be made is known as the payee. . When the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need. Bills of Exchange: Another type of negotiable instrument. Promissory Notes: One type of negotiable instrument. Acceptor & Payee: Acceptor: After the drawee of a bill has signed his assent upon the bill. drafts. he is called The acceptor. the bank is the drawee. The party who drafts the bill of exchange is known as the drawer. the holder in due course obtains full legal title to the instrument. also called negotiation of the instrument. where the individual or business writing the check is the drawer.NEGOTIABLE INSTRUMENTS Negotiable instruments are written orders or unconditional promises to pay a fixed sum of money on demand or at a certain time. the maker of the note and the payee. and the person or business to whom the check is made out is the payee. Drawee in case of need.
and sign it. 5. To be sure that Ali will pay the money after three months.000/.000/. or he can transfer it to Raza to meet any business obligation. Now. he can borrow money from Sunil for a period of two months and pass on this document to Sunil. For instance. If he wants. 10. the instrument is said to be negotiated.on three months credit. if required. Sunil. can further pass on the document to Ghani after instructing and signing on the back of the document. Hassan can hold the document with him for three months and on the due date can collect the money from Ali. like paying back a loan that he might have taken from Raza. For example. Example: To understand the meaning of negotiable instruments let us take a few examples of day-to-day business transactions. In the above example.000/ . . You must have heard about a cheque. if required. This written document has to be signed by Ali to show his acceptance of the order. This passing on process may continue further till the final payment is made.and he can transfer it to muhammad if required. then taimoor can claim Rs.from the bank. What is it? It is a document issued to a bank that entitles the person whose name it bears to claim the amount mentioned in the cheque. Suppose Hassan a book publisher has sold books to Ali for Rs 10.Payee: The person named in the instrument to whom or to whose order the money is by the instrument directed to be paid is called the payee.can also give an undertaking stating that after three month he will pay the amount to Hasan. bill of exchange or cheque is transferred to any person.10. if Haroon issues a cheque worth Rs.000/. Hassan may write an order addressed to Ali that he is to pay after three months.000/.000/.to Hassan or anyone holding the order and presenting it before him (Ali) for payment. He has to write on the back of the document an instruction to Ali to pay money to Sunil. 5. Raza gets a right to Rs. after a month.in favour of Bidhan. he can transfer it in favour of another person. He can also use it for meeting different business transactions. 5. Once he does it. Ali who has bought books worth Rs. Such transfers may continue till the payment is finally made to somebody. so as to constitute the person the holder thereof. Negotiation: When a promissory note. Now Sunil becomes the owner of this document and he can claim money from Ali on the due date. Now Hasan can retain that document with himself till the end of three months or pass it on to others for meeting certain business obligation (discussed above) before the expiry of that three months time period. Rs. for value of goods received by him.
Restrictive endorsements ("Pay to Jane Smith only") and qualified endorsements ("Pay without recourse to the order of Jane Smith") also have the effect of requiring the payee to endorse the negotiable instrument. then the payee must first endorse it and deliver it before negotiation is complete. "Pay to the order of Jane Smith." then it is an order instrument and Jane Smith must endorse it and then deliver it to the payer or drawee. we can say negotiable instrument is a transferable document. Second. Third. or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument. If the negotiable instrument is an order instrument. Thus. it must be payable on demand or at a definite time. To elaborate it further. is a document used as a means for making some payment and it is negotiable i.Understanding of an Example : In the above examples. First. Finally. an instrument. as mentioned here.. where negotiable means transferable and instrument means document.e. Validity of Negotiable Instrument: To be valid a negotiable instrument must meet four requirements. then it may be negotiated by simply delivering it from one person to another with no endorsement required. Endorsement: When the maker or holder of a negotiable instrument signs the same. Such negotiable instruments typically have a blank endorsement consisting of a person's name only. he is said to endorse the same. if the instrument says. it must contain an unconditional promise (promissory note) or order (bill of exchange) to pay a certain sum of money and no other promise except as authorized by the Uniform Commercial Code (UCC). the ownership of which can be transferred from one person to another many times before the final payment is made. we find that there are certain documents used for payment in business transactions and are transferred freely from one person to another. otherwise than as such for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto. it must be payable either to order or to bearer. Endorsements such as "Pay to the order of Jane Smith" are known as special endorsements and have the effect of making the instrument an order instrument rather than a bearer instrument. Qualified . For example. Explanation: Negotiable instruments may be endorsed in various ways. its ownership can be easily transferred. negotiable instruments are documents meant for making payments. Such documents are called Negotiable Instruments. and is called the endorser. Thus. If a negotiable instrument is a bearer instrument. and some negotiable instruments do not require any endorsement. it must be in writing and signed by the maker or drawee.
the letter issuing body comes under the obligation of making the payment if the borrower defaults for any reason. This letter is provided by the financial institutions to the potential borrowers. The nature of this letter can be termed as a request letter.endorsements also affect the nature of implied warranties associated with endorsement. the bank or the financial institution that issues the letter comes under certain obligation. Because of this letter.O. a financial institution requests a person to provide a definite amount to a particular person. This is becoming an important mode of transaction for a number of sector A letter of credit can be termed as a specific document that is issued in certain situations by banks or other lending institutions.C) Letter of Credit: A Kind of document that provides guarantee to a lender that the borrower would pay back the borrowed amount and if the borrower fails to do so. the guarantor will pay that. instead of the borrower. the role of the bank or the financial organization here is similar to a guarantor. Whenever any individual issues letter of credit. According to this letter of credit. it becomes essential for the involved parties to handle the risk factors properly The letter of credit is also important because through this letter. There are certain individuals who also offer this type of letters but basically it is related to the banks. Elements of a Letter of Credit: • • • • • • • A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place Role of the financial Institution in offering Letter of Credit The letter of credit that is issued by the financial institutions is a special type of document where the lending institution plays the role of a guarantor for some other person. . Through this letter. LETTER OF CREDIT (L. So. the borrower gets the chance to draw an exchange bill that is definitely accepted. This amount is treated as a debt.
Thus both are beneficial in the end and ultimately the purpose of a letter of credit is accomplished that it facilitates the trade between the two parties. Charges for Providing Letter of Credit: The bank or the financial institution that provides the letter of credit is always exposed to a huge amount of financial risk. etc. Issuing bank issues LC. These can be used as a mode of payment in the transactions. The letter of credit is becoming a crucial part of the land development processes where it ensures growth of the public facilities. . Seller ships the goods. The applicant is bound to pay this amount to the issuer of this letter. and latest date of shipment acceptable. Buyer applies to bank for issue of letter of credit. and may require cash cover and/or reduction of other lending limits. At the same time. Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied. it is because of this that the exporter and importer can come along because the bank serves as a major guarantor thus facilitating the whole trading process and the chances of default and risk is low. Needs of Letter of Credit: The main purpose of letter of credit is to facilitate international trade. the letter of credit is becoming very important for the international trade and commerce. Advising bank establishes authenticity of the letter of credit using signature books or test codes. a certain amount is charged by the letter of credit providers. It provides an easy transaction system for the businesses where customer and the supplier belong to different nations. Because of this. sending it to the Advising bank by airmail or electronic means such as telex or SWIFT. then informs seller (beneficiary). period of credit offered (if any). Moreover it is because of this letter of credit that the exporter gets prompt payment for his goods as he can negotiate with nay negotiating bank and get his payment and on the other hand the importer remains satisfied that the exporter cannot breech the contract because he has a strong guarantor which allows the trust of the exporter in the business as well. 9 Steps in the Letter of Credit Process: • • • • • • Buyer and seller agree to terms including means of transport. the applicant has the right to ask for the same amount from the beneficiary. Bank will evaluate buyer's credit standing. then assembles the documents called for in the LC (invoice. transport document. On the other hand.).Uses of Letter of Credit: There are a number of uses of a letter of credit. There are a number of exporters who receive payment through these modes.
check that all its terms and conditions can be complied with within the prescribed time limits. for the purpose of facilitating trade. the bank pays the seller and forwards the documents to the Issuing bank. Upon receipt of the letter of credit. If the documents are compliant. the credit professional should review all items carefully to insure that what is expected of the seller is fully understood and that he can comply with all the terms and conditions. Consider whether a confirmed letter of credit is needed. When compliance is in question. Many presentations of documents run into problems with time-limits. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer. . the latest shipping date and the maximum time allowed between dispatch and presentation. If the letter of credit calls for documents supplied by third parties. Upon first advice of the letter of credit. After dispatch of the goods. The Issuing bank debits the buyer and releases the documents (including transport document). so the buyer can claim the goods from the carrier. Ask for a copy of the application to be fax to you.the expiration date of the credit. Tips for Exporters • • • • • Communicate with your customers in detail before they apply for letters of credit. it reimburses the seller's bank immediately. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract. The standby letter of credit serves a different function. make reasonable allowance for the time this may take to complete. The Issuing bank now checks the documents itself. The standby letter of credit serves as a secondary payment mechanism. The credit professional should be familiar with two types of letters of credit: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction. Commercial letters of credit are used primarily to facilitate foreign trade. You must be aware of at least three time constraints . so you can check for terms or conditions that may cause you problems in compliance. check all the documents both against the terms of the credit and against each other for internal consistency.• • • The Advising bank checks the documents against the LC. the buyer should be requested to amend the credit. If they are in order. • • Summary: The use of the letters of credit as a tool to reduce risk has grown substantially over the past decade.
TEACHER’S COMMENTS ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ __________ .
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