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Although the study of money is important for the understanding of the way
in which our economic system operates, we must recall this point that most
exchange transactions in this system are carried on today without the use of
actual money, i.e. Those are carried on by means of credit and credit
instruments rather than money. While money still forms the basis of credit
and deferred payments, it is necessary to examine the nature of credit
operations, and the instruments and institutions trough, which these
operations are carried on, in considerable detail.


On the surface, credit operation appears to be of many kinds, but they all
have a fundamental similarity. In credit transactions, one party to the
transaction, the creditor, turns over to the debtor a certain amount of
money, commodities or services at the present time and relies on the debtor
to repay an equivalent amount, usually the money in the future plus interest
at some future time.


There has been much discussion, concerning the essential basis of credit or
borrowing operation. Some writers on the subject have stoutly insisted that
confidence is the basis of all grants of credit, that if one did not have
confidence that the borrower would repay a loan one would never thinks of
making the loan, save on grounds of friendship of philanthropy. Others have
held property, rather than confidence is the basis of all genuine credit
transactions. Some insist that character is the essential factor, while still
other writers have indulged in a propensity of alliteration by sating that the

bases of credit are character, capital and capacity; or the man and the
means; or reliability and resources.

The verities of credit may be classified in numerous ways- according to the
status of eh debtor, according to the status of the creditor, according to the
time for which the credit is granted, and so on; but the most fruitful
classification usually indicates the use to which the credit is put.

1.Public and Private Credit:

In the first place, a distinction is usually made between public and private
credit. Public credit comprises the promises to pay off governmental bodies,
that is, their acquisition of goods in the present in return for promises to pay
in future; and private credit refers to the promises to pay all nongovernment debtors. Among the sub-classes of private credit, the most
significant are band credit, commercial credit and consumption credit.

2. Band Credit:
In Comprehends all kinds of promises to pay off banking institutions,
including demand deposits, time deposits, notes, bankers, acceptances,
cash, letters of credit, debentures, and bonded obligations. Frequently, the
term bank credit is restricted in use to refer only to the demand deposit
liabilities of the commercial banks, and one must constantly be on guard to
recognize the employment of the term in this restricted sense. As a subclass of bank credit, central bank credit is of outstanding importance in
modern monetary system it includes the central bank's circulating notes and
its deposit liabilities, the better consisting chiefly of the reserve balances of
the commercial banks.

3. Investment Credit.
The credit structure, business if found upon examination to consist very
largely of two forms of credit. Investment credit is extended through loans,
the proceeds of which are put into the fixed assets of a business enterprise.
If the owners of business cannot themselves furnish all of the capital
necessary for investments in land, buildings and equipment. Obviously what
they need is loans of capital running over a considerable period of years.
4. Commercial credit
In addition to seeking credit in long term investment in fixed assets, most
business periodically ask for credit in the form of short term loans.
Commercial credit is business supplier for current business operations, such
as manufacturing and marketing of goods. It often take more business
capital than business can themselves supply to pay for raw materials, to
make the outlays for wages and to carry inventories of finished goods until
they can be converted into cash. To help finance such operations short-term
loans usually running from thirty days to six months are negotiated.
Commercial loans like investment loan must ultimately be paid out of
accumulated earnings of a business. But if the business earnings are of
immediate future, such loans can be safely made and promptly paid.
Commercial loans are base done quick assets, such as raw material and
finished goods, which are in constant process of liquidation and thereby
provide the cash with to extinguish loans.

5. Consumers credit and producers credit

Consumers credit involves advance of purchasing power for economic goods
to consumers for consumption purposes. Its distinguish characteristic lies in
the factor that the things acquired by the debtors as result of the loans are

not supposed to furnish them with the means of repaying the loans the loan
must be repaid out of the income of the borrowers.


There are various types of credit instruments. The more important credit
instruments are as follows:
Bills of exchange:
A bill of exchange is define by negotiable instruments act as "an instrument
in writing, containing an unconditional order, signed by the maker, directing
a certain person, to pay certain sum of money, only to or to the order of a
certain person, or to the bearer the instrument".
A Cheque is defined a bill of exchange drawn on specific banker and not
expresses to be payable otherwise than on demand."
Cheques may be of various types, which are as follows:
Bearer cheque
Order cheque
Open cheque
Crossed cheque
Marked cheque
These are bills of exchange issued by a banker on his branch office. Banks
draft like bills of exchange, are of great importance in the financing of trade,
especially foreign trade
Promissory note:

It is an instrument in writing containing an unconditional undertaking, signed

by the maker, to pay the certain sum of money only to or to the order of a
certain person to the bearer of the instrument. a promissory note in order to
be the so, must fulfill all conditions.
Letter of credit:
A letter of credit as name signifies does one person or bank to another
requesting the letter to pay any amount of money up to a certain limit to the
person write a letter named in the letter or in whose favor the letter is
written. In this letter generally a date is fixed upto only the addressee
should make which advances. Thus a letter of credit remains in force upto a
certain date only. Generally banks grant this letter of credit.