Commercial Banking

Negotiable Instruments  A negotiable instrument is a specialized type of contract for the payment of money which is unconditional and capable of transfer by negotiation.  Negotiable instrument does not have offer, acceptance or and consideration.

For a negotiable instrument following requirements must be met:
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The promise or order to pay must be unconditional Payment must be in a specific sum of money, although excess to principal may be added to sum The payment must be made on demand or at a definite time Instrument must be payable to bearer or to order. The instrument does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.

The main Instrument of credit

Credit Instruments

Pay Roll Credit  It is an oral Agreement between Lender and Borrower that the borrower get the credit facility without any collateral and without any document in support.  Pay back promise is oral.  Such credits are confined to small loans.

Open Book Account or Book Credits
It is account receivable on the books of lender and payable on the books of borrower.  It is speedy way to carry out the banking business.  The payments are slow.  Chances are more to be bad debts.

Documentary Credit Instruments
It is a written contract for making an advance in any form.  It exhibit the terms and condition of credit.  It has the identity of debtor  It has amount of debit, Rate of interest, Validity,

The Main Negotiable Instruments

Promissory Note It is unconditional written promise by borrowers in favor of lender in which borrower promise to pay on demand or at fixed or determinable date in the future the sum of money in principal or part or Principal with profit or part of the principal with profit for the agreed period to the bearer of the instrument.

Promissory Note
Essential Features  The promise to pay must be in writing  The promise to pay must be signed by the maker or payer  The promise to pay must be unconditional I promise to pay Rs.100 on 1st July 2007 to Mr. Ali I promise to pay Mr. Ali Rs.100 when I will get Rs.100 from Mr Hasan. First one is Pro-Note and the second one is Not.

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Amount must be definite in term of money. It must be payable on demand or at a fixed or pre-determine date of future. It must be paid to definite person. It cannot be payable to maker himself. It must have the revenue stamp of prescribe value There are two parties the Maker who draw and sign the Pro Note. The Payee to whom the amount is payable.

Bill of Exchange
It is a note issued by the creditor and accepted by the debtor.  It is an unconditional order in writing which is addressed by a person in favor of other person or institution to take goods on credit.  It is an agreement to pay and to receive by the two parties the amount of credit against the sale of goods in future time

Characteristics of Bill of Exchange  It must be in writing
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It must contain an order to pay The order to pay must be unconditional. Any condition mentioned in the bill change the status of the bill. It must be signed by the drawer and properly stamp. The amount must be written in Number and words. The payment must be in money and not in kind

It is Tri Party Bill Drawer: Person who order to pay certain sum of money. Drawee: Person who order to make the payment. Payee: Person who shall receive the money

Parties of Bill of Exchange

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Written verification of debt that show the amount owned by a person and the exact date of payment. It is transferable and enable to increase in commercial transaction. It is discounting instrument and very useful investment. The risk involved in the actual transfer of money is thus avoided. It can be use for the sale and purchase transaction as self liquidating credit.

Advantages of Bill of Exchange

A written order of a depositor upon a bank to pay to the order of a designated party or to the bearer a specific sum of money on demand or presentation.  A person who draw the cheque is called drawer and the bank on which the cheque is drawn is called Drawee and the person to whom

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I is an order of the account holder without any condition It is drawn upon a certain bank in writing The banker has always to pay it on demand. It is payable to a certain person or to his nominee or to the bearer o the instrument. It is a confidence of bank over the depositor It is promise to be honor and un-honored due specific reason is a criminal punishable offence.

Characteristics of Cheque

Type of Cheque

Open Cheque are paid at the counter of the bank to the bearer Bearer Cheque is a drawer order the bank to pay a state mum of money to the bearer. Only lawful possesses a bearer cheque is entitled to receive the payment Order Cheque is issued in the name of the receiver of the payment and paid only upon through bank only upon satisfaction on identification of receiver.

Cross Cheque have two parallel lines across the face of the cheque with words as “A/C Payee Only”. These cheque cannot be paid on the counter of the Drawee bank and deposited in the payment receiver bank for clearing bank to bank only. General Crossing with two simple lines saying “Payee Account only” Special Crossing It has the name of the bank where it is to be deposited with “Account Only with XXX Bank Karachi”

Objective of Crossing
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It prevents the payment of the cheque to a wrongful holder. It ensure safe payment to the concerned receiver. It facilitates in tracing the recipient of the payment if the cheque is wrongfully crossed. It guard against any cheating or theft Safe and convenient method of payment. Facilitate the transfer of fund from one city or country to another.

It provide safety to money deposited into bank  Payment serve the purpose of receipt.  Saving and movement of currency notes by the use of cheque.  Facilitate credit which in turn helps in the growth of business in the country.  It is an evidence to pay to the receiver.  It is a legal obligation and proof of promise to pay on the date specified.

Promissory note exchange
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Bill of

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It is promise to pay Two Parties involve The Maker who sign and the payee Unconditional promise by the maker to pay Cannot be made payable to maker Need no acceptance Notice of dishonor for non payment is not necessary in case of Prnote

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It is order to pay Three parties involve The drawer, The Drawee and the payee Unconditional order to the Drawee to pay It can be made to drawer and then have only two party Acceptance is must Notice is give to all person libel to pay.

Promissory Note Exchange

Bill of

The tow parties are immediate relation the maker and the payee It is not drawn in sets. The liability of the maker is primary and absolute

Parties in immediate relation are the drawer and the acceptor. It is drawn in sets. The liability of the drawer of the bill is secondary

Bill of Exchange Cheque  Drawn on some person 
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It is drawn on bank Payable on demand Does not require acceptance No of days grace are allowed for payment on cheque or immediately paid on demand A cheque can be crossed Notice of dishonor is not necessary

or firm including the bank Payable on demand or on expiry of a fixed period Acceptance is necessary before payment can be asked. Three days of grace are allowed fro payment on a time bill of exchange but not on demand.

Cheque is paid on demand to bearer is valid. Payment on cheque can be stopped buy the drawer. A cheque is not to be noted or protested in case of dishonor A cheque does not require stamp

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Crossing of bill is not allowed Notice of dishonor is necessary to hold the parties labile hereon A bill of exchange cannot drawn payable to bearer Payment cannot be stopped or counter minded by the drawer. A bill is noted and protested to establish dishonor It must be stamp

The Bank Draft

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An order by a branch of a bank to another branch of same bank or to correspondence bank to pay certain sum of money written on the order on demand to the person named their in. Drawer and Drawee bank is the same but branches are different The amount payable is specified in the draft The person to whom amount is payable is also specified therein It is payable on demand It is an unconditional order for payment

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It bears no stamp It bears the signature of the authorized official in his official capacity including his code or attorney number The amount of on the draft is embossed in Numbers. It is different from the cheque in several respect A draft cannot be made payable to bearer. Bank is under legal obligation to pay the money to the draft. The banker has the direct liability to pay the draft.

The Credit Advances
Credit advances are the funds that reached to the bank through various sources and specially by the deposits from the clients of the bank on lower rates of return and advances made through these funds on higher rates for specified period of time and for various transactions and modes.


Type of Advances
Over Draft it is the right given by a
commercial bank to his customer to draw in excess of his current account upto the fixed limit |Cash Credit It is an arrangement by which the banker allows his customer to borrow money upto a certain limit against the Collaterals Bill Discount Payment against the bills of export or purchase order under documentary credit or Local or International Purchase Order

Precaution for Cash Advances to advance the  Primary function of the bank is
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Funded or Non funded facility. Bank prefer to invest its funds into financing or lending activities on secure basis. Non of the banking facility is facilitated to the customer without proper appraisal or history and conduct of account. Bank and customer confidence create the facility of all nature and type.

Qualities for Advance

Honest-Responsible-Trustworthy Customer The prime factor to advance the facility to customer the banker must be fully satisfied with the needs and utilization of the advances that the customer requested. Banker deal with hones and responsible person documents of title and convenient of securities against advances.

Familiarity with Different Markets

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The banker must be familiar with the fluctuation of the prices in the commodities against which he is to advance. He must have knowledge of the different markets enables the banker to regulate the margin for loans against produced goods. He must know the financial products offered by other banks. He must know the appraisal procedure and sense of judgment to the request made by customer.

Readily Cashable Securities  The banker should advance against securities

and collaterals which are easy to cash in case of default or liquidation. All advances are made after proper documentation and procedures Proper evaluation to be made prior to the advance approval

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