BILL PURCHASING:

Here bank keeps/treats the bill(cash memos yet to encash) as a collateral or

security for providing some advance(according to the quantum of the value in bill)
to the presenter of the bill   so that in case borrower fails to pay the loan ..then
bank will use the bill to collect back the money as they (bank) have purchased the
bill n they own it....

BILL DISCOUNT:

The drawer of bill with a future maturity date approach bank to encash the bill
before maturity date with some charges by bank and the drawee of the bill pays
full sum directly to bank on maturity date of the bill. but if drawee fails to do so
then bank may charge some interest on a pre determined agreement with drawer
which may be paid by either of the party or jointly or whatever.

Types of Bill purchase

Inland bill purchase

A bill of exchange that is both drawn and made payable in the same country.

Foreign Bill purchase

A bill of exchange that is drawn in one country and made payable in another:

 used extensively in foreign trade

Banks follow the following principles of lending:

1. Liquidity:
Liquidity is an important principle of bank lending. Bank advances loans on the
security of such assets which are easily marketable and convertible into cash at a
short notice. It is essential because if the bank needs cash to meet the urgent
requirements of its customers, it should be in a position to sell some of the
securities at a very short notice.

2. Safety:
The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular intervals
without default.

3. Diversity:
The principle of diversity applies to the advancing of loans to varied types of
firms, industries, businesses and trades. A bank should follow the maxim: “Do not
keep all eggs in one basket.” It should spread its risks by giving loans to various
trades and industries in different parts of the country.

4. Stability:
Another important principle of a bank’s investment policy should be to invest in
those stocks and securities which possess a high degree of stability in their prices.
The bank cannot afford any loss on the value of its securities. It should, therefore,
invest it funds in the shares of reputed companies where the possibility of decline
in their prices is remote.

5. Profitability:
It should, therefore, invest in such securities which was sure a fair and stable
return on the funds invested. The earning capacity of securities and shares
depends upon the interest rate and the dividend rate and the tax benefits they
carry.

Definition of Securities:

Securities are negotiable financial instruments issued by a company or

government that give ownership rights, debt rights. Securities are traded on the
exchange markets.
Types of Securities
 1. Equity securities
Equity almost always refers to stocks and a share of ownership in a company
(which is possessed by the shareholder). Equity securities usually generate regular
earnings for shareholders in the form of dividends. An equity security does,
however, rise and fall in value in accord with the financial markets and the
company’s fortunes.

 2. Debt securities

Debt securities differ from equity securities in an important way; they involve
borrowed money. They are issued by an individual, company, or government and
sold to another party for a certain amount, with a promise of repayment plus
interest. They include a fixed amount (that must be repaid), a specified rate of
interest, and a maturity date (the date when the total amount of the security
must be paid by).

Bonds, bank notes (or promissory notes), and Treasury notes are all examples of
debt securities. 

3. Derivatives

Derivatives are a slightly different type of security because their value is based on

an underlying asset that is then purchased and repaid, with the price, interest,
and maturity date all specified at the time of the initial transaction.

A derivative often derives its value from commodities such as gas or precious
metals such as gold and silver. Currencies are another underlying asset a
derivative can be structured on, as well as interest rates, Treasury notes, bonds,
and stocks.

 
What Is Trade Finance?
Trade finance represents the financial instruments and products that are used by
companies to facilitate international trade and commerce. Trade finance makes it
possible and easier for importers and exporters to transact business through
trade. Trade finance is an umbrella term meaning it covers many financial
products that banks and companies utilize to make trade transactions feasible.

KEY TAKEAWAYS:

 Trade finance represents the financial instruments and products that are

used by companies to facilitate international trade and commerce.
 Trade finance makes it possible and easier for importers and exporters to
transact business through trade. 
 Trade finance can help reduce the risk associated with global trade by
reconciling the divergent needs of an exporter and importer.