ue pick CAN GON Chapt, 1 ROWTH OF IGIN AND G OTOMMERCIAL eee OF BAN! 4. EVOLUTION Se rigin of the word ‘Dé i re means a ‘bench’. The other poing that There are various note 20H TNS OEE Bein ot tty coe ts Snes en ea As regards the growth of modern commercigt ‘of Money’, has traced qh, &y 600 BC. G.Crowther in his famous book, ‘An fing to him, the present day tis at modern English Commercial banking. According and (3) the money lend: akan | Tice Guseatars: Gy ine mechani GROVER 1 the mittee tne earliest stage in the 3rowt Oo eID i workifig of merchants. These merchants were jege to another. It was The tage? Sivitics ware carried on by them from one PX Feet AL Wa hy al traders to carry metalic money with {hemseNes TT tes of mone Mt reputation began to issue receipts which Were aCe Sub Continent wet, Th receipts or letters of transfers also called fuad in Beers the earlest Were the og mode of payments. The merchant banking "hus Stage in evolution of modem banking, ‘ 2. ‘The goldsmiths. The! second stage inte SE oe is normaly tay, li ths also cal rece; " earlir goldsmiths, These goldsmins aso ca TT receipts for tne veg and silver for safe custody. The gold money (gold and sliver) kept with them. These receipts with the passage oft, became payable to the bearer on demand. In this Way the ‘goldsmiths’ note, beg, aeeaitinh of exchange and a mean of payment. The goldsmiths, thus, can righty, termed as the fore-runners of the modern bank note i 3. The money lenders. The third stage in the development of banking arose when y giePgoldsmiths became the money lenders. By experience the goldsmiths (wo wes or# V5 Siled money lenders) came fo Know that they could keep 2 small proportion o i farts total deposits for meeting the demands of customers for cash and the rest ego could easy lend: Tey aloned the depositors toda ver ‘and above the mong : Sctually standing to their credit In Economic terminology, wo.can say that ty allowed the overdraft facilities to their depositors. When every money lender/goldsmith issued receipts and most of them allowed te overdraft facilities, there was then too much confusion in’the banking system’ Te money lendersigoldsmiths, in order to earn profits, could not keep adequate reserves meeting the demands of the customers for cash. The failure on the part of the mors fenders/goldsmiths to return money caused widespread distress among the people In order to create confidence among the people, steps were taken to regulate tt banking organization. A Conference was held in Nuremburg in 1548. It was decided tt a, bank should be set up by the state which should streamline the banking organizabank was fo, ‘ toot The modern med In Ge din the ninoteonth century” a passage of time, the Sco} ‘ al with large number ef matte commercial banks have greatly increased. farmers, household; ch as obtaining funds, advancing loans to ete, etc. The commercial a ng avesments in ‘stocks, clecoiiag Bike of: ortant role in the financial mays, ©"® NOW multi-service orgarisatone ard olay arkels and economic developrnent a tne County, a 2. FUNCTIONS OF neva in 1578. Bank of England mercial banking system actually A COMMERCIA a Commercial Bank? Balt primar ls vith money and credit. tis organized on ey for the earning of profit. Commercial bank 1 these? Companies at a lower rate of interest and 0 those who Need them. The difference between the at which it lends forms. the source of its profit. A lute, Accordin, ig to Crowther, “A bank is a firm pare. it lends money to those who na: “A bank is a firm that takes deposits from to other households and firms”. functions of a commercial bank are (a) ‘accepting of deposits and (b) of money. rst important funtion Of a bank is to accept deposits from these who can save t rofit i to ; hemselves. In order to attract the he bank maintains the following three nt Account. The businesses and traders usually maintain their funds in current ‘Current account is one where money is constantly being drawn out and put ee the money is withdrawable at anytime by the customer, therefore, the barke do not pay interest on current deposits. Current account holders receive a Pook and regular statements containing details of money paid in and paid @ccount. The aim of this account is to encourage and mobilize savings of the faving account is generally opened by persons of small income. The banks est on this type of deposits. However, the banks normally place restrictions {quent withdrawal. deposit account. Fixed deposits are kept with the banks for a specified period ne. The rate of interest on fixed deposits (also called term deposits) are fairly he longer the period of deposit, the higher is the rate of interest. :we (B) Making toans, Tho second major funetion of a commercial bank is to make loans to 4, rpertere, households, etc. These loans are made against docume. Ja, marketable securities, personal security of the borrowers, etc. 61% ys metions of a modern bank, advancing or lending is by fe the most im: advances comprise a very large portion of a bank's total assets. The strana), "ay ie primarily judged by the sound o of its advances. : The lending of money may be in any of the following forms. () Loans, The commercial banks grant short and long term loans to ingiy, ‘and companies mostly ag ‘The amoi Nu; vainst securities. The amount of loan is crao¥%s , I acount who withdraws i as per hi requirements eAiteg borrewer 8 account who withdraws it as p' dit, It is a very common form of borrowing by business oo, Ww) peer ‘tdvance long term joans to the commercial and industrial unis a) security of goods, The borrower is permitted to draw within the cash ry, sanctioned by the bank, The interest is charged only on the amouny (rt withdrawn by the borrower, na) ft. It is a convenient form of short term financing by a bank oo ‘a customer may arrange with his bank to permit him to overt ‘current account, known as an overdraft (O/D). The bank allows customer to.) % his account upto a certain limit on providing security of shares, insurance deposit receipts etc. Whenever the customer has surplus funds, he May pa, funds into his current account to reduce the loan or even to settle the balance, Interest is charged on daily balance on the overdrawn amo, difference betweon cash credit and overdraft Is_that cash credit is 9), regular basis and for. ms. The overdraft facility Is for a short poy om {iv) Discounting of bills. The bank also makes loans to their customers by gig, ills of exchange. Discounting of bills refers to making the payment of bij tela turity. The discount charged is the earning of the bank. The premature 53 made is a Joan to the holder of the bill, Discounting OF Bills by bank is consi" safe, certain and liquid form of bank lending. " (bank lending MQ (2) Secondary Functions The secondary functions of a bank are classified as (a) Special Financial gy ‘and (b) Agency Functions. (a) Special Financial Services: The business of today is highly competitive. It is not enough for the banks ny accept deposits and make loans. Banks are now offering international services sic currency exchange, issue of letters of credit, banker's acceptances. Most of commercial banks are also offering ATMs (Automated Teller Machine) and Ee: Fund Transfer (EFT). (b) Agency Functions: , Banks act as agents of their customers in various ways as. (1) Collection of Cheques. It acts as agents to its customers in the collection payment of cheques, bills and promissory-notes. “ (ii) Collection of Dividends. The bank provides a very useful service in the collect dividends or int arned on shares held by its customers.11 — ORIGIN AND GROWTH OF COMMERCIAL BANKING 137 purchase or Sale of Securities. The bank. if authorized by the customer, purchases ‘or sells Securities on his behalf and thus adds another bens elit to its portfolio. jexecution of Standing Instructions. The customer may order in writing to his bank Mp make Payments of regularly recurring nature to an mdividuel or frre by debiting them f0 his account, The bank will make payments and charge a small commission The payments will be stopped on written instructions of the customer only Acting as Trustee or Executor. It a client directs his bank to act as trustee or W) Gecutor inthe adminstatice ef a will or in any business settlement requiring a "technical knowledge, the bank will take this responsibility also for the benefit of its ~ customer and charge a small fee for providing this essential service x _____ 3. ROLE OF COMMERCIAL BANKS IN THE ECONOMIC oh DEVE! COUNTRY ToL = “ook Commercial banks play an important and active role in the economic development of country. i the banking system in a country is effective, efficient and disciplined, it Js about a rapic growth in the various sectors of the economy. The economic ificance of commercial banks is given in brief (t) Banks promote capital formation. The commercial banks play an important role in “ falsing of the financial resources. They encourage savings by giving various types of gs to the savers. They expand branches of the banks in rural and urban eas and mobilize savings even at far of places.. These savings are then made valable to the businesses which make’ use of them for mrodeetios purposes in the country. fie: banks. are,, there! -only_ store" houses. of the” ‘country’s ' ¢ + not only. ES Be siso “provide stream of ‘resources ‘necessary for economic mer (Investment In new enterprises... Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and oy or pra artey rePreneurs to invest in new enterprises and adopt new Oe tran nom seage-and industry. With the growth of commercial banking in the 19th and 20th Centuries, there is vast ex; i Pansion in trade and industry. The use of bank draft, cheque, bill of exchange, credit cards etc. has revolutionized bith and international trade. ear niemationalirade. adequate capital for meeting their business investment, trade and production in the economy Bauks Provide ad foxy seyetecd aX euetl ag Technical Keon hous needs. This, in turn, increases wk(8) Influencing economy activity. The banks can also infers economic i. of the country through its influence on (a) availability of i (0) the nh interes the commercial banks. are tie Le eee ate ae one, circulation through credit creation or by low itge affects economic development Alo ate of intrest an-encourage BVestmen credit creation activity can raise aggregate demand whic! ore prog in the economy. che Ly SRI i Q ae kof the count <€<* (7) Implementation of monetary policy. The central bank o! tie b es Contos wet regulates volume of credit through the active exeperation of te be ing sya eX the country. If helps in bringing price stability and promotes e ic grow, vi ke shortest posible period to time. (8) Monetifation of tine ecanomy. The commercial banks by opening branches, : rural and backward areas are reducing the exchange of goods through bare use of money has now greatly increased the volume of production of goods 7, monetised sector (barter economy) is now being converted into Monetiseg with the help of commercial banks. the exports of the coy (8) Export promotion cells. In order to increase | ny, commercial banks have established export promotion cells. They provide informat® about general trade and economic conditio inside_and_ outside the coun, its customers, The banks are, therefore, making positve contribution inthe pd ‘of economic development. Role of banks in 21st century. Tho commercial banks are now not confined to local banking. They ar jy changing into global banking i.e., understanding the global customer, using lays information technology, competing in the open market with high technol system, changing from domestic banking to investment banking etc. 11 commercial bank are now considered the nerve centre of all econon, development in the country. t Seq, irtual Banking. The use of on line banking in 21" century is on the increase anjy has brought revolution in the banking industry. The banks along with strengthening ts banking customer relationship are also providing the banking services through extenie use of information technology without direct recourse to the bank by the customer t is called virtual banking. The orgin of virtual banking can be traced fo the 1870s ut the installation Of ATM's. The principal types of virtual banking services. intvi Automated Teller Machines (ATM's) Electronic Fund Transfer at point of Sale, Snst Cards, phone banking and more recently internet banking. With the increasing usec internet banking, there is greater reliance now on information technology and te decrease of physical bank branches to deliver the banking services to the customers 4. CLASSIFICATION OF BANKS Types of Banks on the hasis of sphere of activities: The commercial banks are classified into various types on the basis of their sphers of activities, ownership, domicile etc, The main types of banks in Pakistan are as under (A) Classification on the basis of functions (1) Central Bank, Every civilized country now has its own central bank The primaty function of the central bank is to regulate the flow of money and credit in orde'!= NIAt BANKING 13v ficiency, stability ang ‘i k of mote_e! : growth in the country. In Pakistan State Ban prostan, is the Country's centra Na Ep enty._ in ica pos Bech Re serve Spee eam th ‘England it in Bank of England, in Amer ie : i ial Banks. Commercial i ‘ommere’ | Banks are those banks which are engagad_in 0 jeforing. tne routine cuties o Hanking business. They collect surplus money from fné people. They f loans and advances in the form of overdrafts, cash credits, unting ills of exchange. Commercial tars ISo_creates money. They also vide agency services and gepere/ial_banks al ~ipates_money. 7 General utili ks, in short, are prreidered the lifeblood of the economic Yosely ae Pakistan” No |, Habib B hange Banks. Exchange banks mainly ‘deal with international trade. These 1) Fenks take the responsibilty of cetera) of foreign axchange and arrange the ign business. In Pakistan, ‘all the Nationalized commercial banks have been ed to do the business of exchange banke ae saving Banks. Saving banks are those banks which collect and keep the small () Savings of the. publ 6y are called|thritt promoting institutl = reset e securities. Pos! the business of savin perform ‘Bani oes Pakistan, ee s a) agricultural Banks. gricultural banks are ‘Set up Ao provide financial basisiante to, é the agriculturists. The agricultural banks Provide short term credit to the farmers for Seagarchase of purchase Of seeds, manure, ete. They also make medium term advances for buying tractors and introducing modern techniques in farming. In Pakistan, Agricultural Development Bank of Pakistan was set up_in 1981 for meeting the financial Fequirement ra peur ture : (6) Industrial Banks. The industial banks mainly provide, medium and long term credit to the industries. Since the industrial banks have long term deposits, they are ina ‘position to permit long term investment in industries. In Pakistan, the industrial | | Development Bank (IDBP) was set up in 1961. The other institutions engaged in | providing financial assistance fo industries are PICIC, NDFC, ICP, etc. (8) Classification on the basis of ownership (7) The banks are classified, on the basis of Ownership, into three ceteilorics ie., (i) Public sector banks, (ii) Private sector banks, (iii) Cooperative banks. (@) Public sector banks. They are owned and controlled by the government such as National Bank, Habib Bank etc. ®) Private sector banks. These are owned by corporations such as MCB, ABL, City Bank etc. (c) Cooperative banks. Cooperative banks are established mainly to provide short and medium term loans for rural development in general. In Pakistan, these banks are set up under the Cooperative Society Act of 1925 in the country, (0 Classification on the basis of domicile. t offices and saving centre \a&million wean 5. TEST OF EFFICIENCY oF A GOO! commercial st possi Ss 1 bank is judged as t0 how it ma, ible profit. In technical term, 2% The efficiency or performance of & jio Management. 4, its assets and liabilties in order to earn highes an s the following fOUF main cone say that the effici ud ha: a liabilities of a bank has tne © er (abuty menspioy S ~ while managing the assets an t Concerns of a banker nN Meme BRmo 4 Lg The main concerns of a banker are as under Pres, TOE) Liquisity managements Liauicly Mt Fe eats Keep ae vt Me Liquidity managements Pity asthe potion ge ae) Salata can be conerid 0 aA ne a ee easly andy t total deposits in the form of cash oF wr Le, total deposits ih to pay its depositors on demand. The lauicly inet, ed, Yo or maintaining confidence pf the de ositors of the bank. ), ta" Another important consideration for an efficient ban wm (ii) assel management: An Line E tr : ion for an ec ihe. tisk of default or the failure of th “oine nae of investing in asselS Which have a joys _ 2 oA k@ithe risk of default can be reduced by | \eawge" of default sindividuas we 'e diversification of loan advances keeps the asa of the bank safe and segue is an important concern tars (in) Liability management ) the mare efficient bankin i ey should not depend on current deposits as the prima source of bank funds@instead they should aggressively set target 9 ss Torte the funds can be acquired from loan markets utc assets growth. For example, involve lesser transaction sor. ont cy: An efficient banker must decide the amourtd] t (iv) Managing Capital adequ - capital he needs and then make efforts to acquire the needed capialz minimum possible cost. ¢ Features of an efficient bank a While managing the assets and liabilities for attaining highest possible prof banker has to keep in mind the four watch words of safety, greater liquiti) t depositors confidence and maximum profitability. The bank's needs for liquid solvency and profit are competitive in nature. For example, the bank assets that prove maximum liquidity generate little or no income. An efficient banker, has to strike it. If he succeeds fhe bank will be regarded as efficient bank. In the wor bility of more ™ achieving this object Crowther, “The secret of success of a bank is not on the avaCOMMERCIAL BANK CREDIT 1. WHAT IS CREDIT? 4. Definition of credit. The wer create is derived from the Latin word ‘Credo’. The word ‘Credo’ means. | trust you. It is defined by Gide as “An exchange which is complete after the expiry of a certain period of time after payment”. Credit is explained as the sale of goods and services and money claims in the present in return for a promise to pay in the future. The promise usually based on the confidence and on the belief that the debtor whether a person, a business firm or a government unit will be able and willing to pay on demand or at some future time. Credit, therefore, is defined in the following words, “Credit is the right to receive payment” or the obligation to make payment on demand or at some future time on account of an immediate transfer of goods. The first phrase ‘tight to receive payment’ is used from the point of view of the creditor as he. is to exchange present goods for the right to receive payment in future. The second, an obligation to make payment on demand, is the phrase from debtor's point of view. The debtor has an obligation to pay in’the future for the goods acquired. Credit and debt are thus two sides of the same shield. 2. FUNCTIONS OF CREDIT What is credit? To give credit is to finance directly or indirectly the expenditure of others against future repayment. Credit is the foundation upon which the economic structure of the countries both developed and developing is strengthening. The main functions which arise from the use-of credit are summarized below: (1) Economy in the Use of Metal. Credit instruments are used as medium of exchange in place of metallic coins. There is thus a saving of precious metals. Moreover, the use of credit instruments in all business transactions is more effective and convenient than any other form of money. (2) Provision of Working Capital. If an industrialist is short of spending power when the production is going on, he can finance the industry by obtaining credit from the banks. He need not sell the plant or other fixed assets just for the purchase of raw Materia, paying wages to the labour insurence-sharges-sleciciy-hil-ot_oer / pressing emergencies. (3) Sales of Bonds. If the prospects of invested capital are bright and the profits are being earned left and light, the firm can obtain possession of funds even by selling bonds. The firm can repay the interest as well as principal amount easily at the specified date out of profit earned during the course of production. (4) Case of Young Firm. Credit enables the entrepreneur of a young firm to develop its resources at a rapid speed which otherwise would not have been possible.i have provided a re, le Production. The institutions of credit ad the production is increased on large scale. The cost of production of commog, reduced. The quality of product also improves with greater technologicay carriéd on in the big firms. “6 eople who hifting of Capital to Productive Hands. There are peop! have «, & ease themselves Instead of keeping the money idle in their safe deposi lend it to the financial institutions. Credit thus makes possible the shifting of 7s to those people who can use it productively ne, (7) Entrance of new Entrepreneurs. Credit makes possible the entrance of ney, ., in the business enterprise. If a person has less capital of his own but has 3). qualities of a good entrepreneur, he can set up new firms and develop »,,,. techniques of production and thus the resources of the country are effec, utilized oy © (8) Purchase of Goods. Credit makes it easy and convenient to the consumer, purchase or hire durable goods. A consumer can acquire flour, cloth, ;34. telephone, car, house, washing machines, etc., from the dealers with an obligai.” to pay in future either by instalments or in lump sum. The credit thus proviges opportunity. to the consumers to use and enjoy more goods which otherwise vq, not have been possible if the payment is to be made in cash a / (9) International Payments. International payments, especially through the pil; exchange, have been greatly facilitated. There is no need now to import or expin gold for settlement of international business transactions. - (10) State Revenue. If a government expenditure is in excess of its current revenue K can meet the deficit by the sale of bonds. Thus the timely needs of the state 2: satisfactorily met through credit.CREDIT ANALYSIS There are sometime defaults in the paym ime Pays of God’ such as drought, famine qe non-payment of obligations may be due to act: etc. It may occur on account ‘of changes in con: i labour, competitive price cutting, inefficient management. slump in the market, etc"* “Credit analysis refers to the investigation of such factors that may drastically Chan, ey fortunes of Business and lead to default in the repayment of a loan to commercat yoy 1. FACTORS CONSIDERED IN CREDIT ANALYSIS Components of Credit Analysis ors which are taken into consideration while agy fficer of the bank examines the credit worthiness 2° dof his business, his ability to repay the Teg ss to create income, etc. All these Tact hin lection are referred to as the five C's of ‘Ors ig iscuss these factor i There are a number of fact loan to a borrower. The lending o borrower. He: looks into the past reco’ integrity, assets, the ability of his busine credit analysis or the elements in credit sel ar | and Conditions. We now di Character, Capacity, Capital, Collateral brief. (1) Character. Credit, as we know, is 2 man’s faith in man. The credit characteris ba, pay the obligations. It is tested in adversiy 4 on the borrower's willingness to re order to judge the credit character of the prospective borrower, the loan officer si! have to see his family background, stability of loyment, node of living, pero habits, nature ‘of business, moral reputation, the values important to him him, Prev Tecord of payments, etc., etc. The borrower who lacks one or more than one ty attributes stated above will not be considered credit worthy. (2) Capacite to Pay. Another primary consideration in credit evaluation is the borrovey ability to meet the obligation when it is due. The Joan officer determines ty three acceptable{SOUrces | sale of assey, borrower's ability to repay the loan from ther sources and income. The banks normally do notte borrowing money from of atthe money advanced should be repaid by the sale of assets or borrowing fron another lender as that involves many complications. The third source, i.e., income which is looked with favour by the banks as method gi the most acceptable mean if the prospective borrower is of a good health, educates) repayment of obligation. | skilled, resourceful and is employed in a service in which regular salary increase j} anticipated, the loan officer can be liberal in extending loan‘to him. If the prospective borrower is a businessman, be judged by such factors as the location of plant, quality and quantity of gous e market, contracts with the buyers, nearnessit produced, competition of goods in th market, trade relations, managerial capability, research programme carried out the factory, etc., etc. If the loan officer is satisfied that the flow of income is sufficie or will be adequate in amount to repay the obligation, the credit can be extended It the borrower, if a businessman or a salaried person has no ability to create incon# with which to repay the loan, it will be unwise to advance loans.ke pital. The third factor w jective borrower. The furniture, utensils, sto hich is assets of aos ™Portant is the ownership of assets by @ “ah KS, etc. ate numer May be in the form of house, motor ‘form of raw material, plant, machines, \ business concern may own assets in the foffower stand as. security for"! building inventory, ete, ete. The assets Of & urcefulness of the borrowey the loan. “They also. show the prudence and ness CONCErNS in pro, othe 2anker can accommodate consumers or busin and strength of the born @8sets or capital held by them. If the financial a i rowers is stable and the assets held by them are liquid, be made available to the b 'sh without loss of value, then large funds eat is not liquid, then itis very, ake peel the equity used as a lever to obtain y collateral. The fourth © of Credit is collateral securi it ck: curity. The collateral security may consist of storks and te exStable bonds, bils of exchange, bills of lading, warehouse receipts, pis, etc.. etc. The banker while Tal t t loan lly examines the read Se ee ac aran caret the wate side, aC Marketabilty of the security “offered. In order to be more on tt ne a et the banker does not ordinarily, loan up to the full current value of the collateral. The amount of the loan offered against collateral varies with theit types and business conditions prevailing in the country, The securities offering ernment guarantee may get 100% loan against their net worth, the other may get 50%, of even less than their market worth. The banker is to protect the amount advanced and this can only be possible if the security offered for loan does not lose iis value when converted into cash. Collateral which, in fact, is very closely related to pital is a good asset and it increases the ability of the borrower to obtain funds jonditions. The fifth C of credit is economic conditions. Economic condi tside the country affect the ability of the borrower to repay the loan. If the | gnomic conditions are favourable, new loans will be extended, old loans along with est will be repaid well in time. In case of recession, then the capital may be issipated. Income is to fall and then there is a possibility of the borrower's character ig undermined. The bank loan officer has to be very cautious in extending credit borrowers both in the periods of prosperity and adversity, He, according to d has to “keep his hand on the economic impulse of the nation, the community dhe industry in which he specializes in making loans” 2. SOURCES OF CREDIT INFORMATION main sources of getting, information, regarding five C's of credit, i.e., character, j, Capital, collateral and conditions of the prospective borrower are as follows: ns in and fiew. The bank officer can evaluate the credit worthiness of the applicant by Mietviewing him. He can judge the borrower's honesty and ability to meet his Obligation by putting him questions on his business record, type of goods produced, Purpose of the loan, method of repayment, security offered, etc., etc. If the loan is satisfied with the information and the record supplied by the customer, the it can be extended to him. 9) na person or a firm approaches a bank for obtaining Nee eee a ee earn ncaa Tedit worthiness by examining the previous records and their past dealings with the Mers and the bank. If the examination of record reveals a large number of IMed cheques, the applicant being delinquent cannot be relied upon. In case the I€qUes and bille discounted have always been honoured, then due weight can be WWen for evaluating the loan application=e (3) Financial Statements. The bank can obtain valuable credit information of the i it, recon, 7 from the copies of its balance sheet, profit and loss account -Oncilaty, ‘surpluses and budgets of the last few years. The balance sheet is a still phos , o of the business unit and it reveals the entire liquidity position. +4 Id, there are s; (4) Credit Agencies. In advanced countries of the world, e PeCial «, Teporting agencies which publish complete reports about, business Conceing sat bank loan officer can evaluate the financial strength of the firm APPIVING for loan the information supplied by these credit agencies. Dun and Bradstreet j, |," Syeds in England have a continuous credit reporting services in their respecyt countries. ‘ (8) Other Sources. Another source of credit information on big business firms j, , periodicals, trade journals, newspapers, directories which provide infor n i Mation time to time of the history of the firms, ownership and changes in the stateme, liabilities and assets, etc., etc. from Ms ofINSTRUMENTS OF CREDIT street ordinarily thinks that paper money and metallic coins a, ips at of exchange. The fact is that credit is playing a dominant roje hy Feeder business by transferring money to the borrowers and then subsequentiy 1," the jenders. There are numerous ways by which the credit can be extended. go" them involve the use of credit instruments and in certain cases t le Credit is exten without any written contract. The main instruments of credit are, therefore, clac.. under three heads: (1) Pay roll credit; (2) Book credit; and (3) Written instrumens (1) Pay roll credit. Pay roll credit is also called oral agreement. In advanceg developing countries of the world, some credit is extended to individuals, businesses associates without keeping any record or documents. The agreemen, pay back the money is purely oral. if a borrower refuses to pay the money creditor cannot prove the existence of any obligation. Oral agreements are mo confined to small loans. (2) Open Book Accounts or Book Credits. Open book account merely consisis « entries on the books of business concerns. These entries appear as an Accoun, receivable on the books of lender and as an account payable on the books 4 the borrower. The main advantage claimed for the book account is that it is ven simple and speedy way of carrying on the business transaction. The drawback y:, this method is that the payments are normally slow. There are also chances of amount advanced becoming a bad debt (3) Documentary Credit Instruments. However, most of the credit is evidenced by 5 written contract. The instruments of credit or debit exhibit the existence and terms ¢} debt, the identity of the debtor, the amount of the debt, the rate of interest, the tins of the maturity of the loan, etc., etc. When the instruments of credit or debt se evidenced by records and documents, they eliminate doubts about the nature ars terms of loans. They also facilitate recovery and make the ‘instruments mor negotiable. The main negotiable instruments are: (1) Promissory Note (2) Bill «1 Exchange and (3) Cheque: