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LOANS AND DISCOUNT

FUNCTION

TYPES OF LOANS
1. DEMAND LOANS
repayable at short notice

2. TERM LOANS
• granted for more than one year and repayment
of such loans is spread over a longer period.
• The repayment is generally made in suitable
instalments of fixed amount.

FUNCTIONS OF LOANS
• Purchasing Assets
o One of the primary functions of loans is to help
borrowers purchase assets.
o For individuals, this usually means buying a piece of
property or a car or a similar large purchase.
o Businesses, on the other hand, have a wide variety of
assets that they need, ranging from factory
equipment to expensive computer software and
hardware.

bonds or other types of securities. o Improvement loans are designed to help owners make additions to their property or repair large-scale damage. FUNCTIONS OF LOANS • Investment o made specifically for investment in stocks. • Construction and Improvement o It is more common for businesses like contracting firms to seek out construction loans for large building projects. .

like refinances. help borrowers get their debt under control. o Debt consolidation loans. . FUNCTIONS OF LOANS • Debt Management o seeks to restructure an individual's loans so that the borrower can continue making payments if they are having revenue problems.

Direct Loan Discount Loan And Rediscount GRANT LOANS Loan Overdraft Line .

Discount loan and rediscount loan—Discount loan is the interest and financing charges are deducted from the face amount when the loan is issued. Overdraft line—A line of credit that banks offer to their customers to cover their overdrafts. c.a. Direct loan—A loan made available to a borrower directly from the issuing bank. May result in lower interest rates and fees. Rediscount is the act of discounting a short-term negotiable debt instrument for a second time. . b. Overdraft protection kicks in when a customer writes a check for more than the amount in their account. No third-party is used to any part of the loan.

Unsecured loan SECURITY —It is obtained without the use of property as collateral for the loan. . LOANS ACCORDING TO b. a.Borrowers generally must have high credit ratings to be approved. Secured loan — It is a loan in which the borrower pledges some asset as collateral for the loan. .

THE EXCHANGE FUNCTION Commercial bank covers domestic and foreign exchange .

LOCAL  Clearing and Collection of Checks. EXCHANGE Drafts and other Items .

 banks also clear and collect instruments FOREIGN involved in the international network EXCHANGE provide the means of payment for international buyers and sellers .

Hence. The date of payment is of utmost importance in determining these rates. it becomes EXCHANGE RATES evident that the method of transferring the funds would be a matter of importance. therefore. Payment transmitted by cable rather than by mail would make a significant difference in the rate of exchange. determined by supply and demand for foreign exchange. . are prices and are .

ITEMS EXCHANGED .

. LEVEL… . . .Cheques drawn on banks within the city are the subject of interbank offsetting of ON DOMESTIC balances. the check has to be cleared.When a depositor deposits his check instead of encashing it.This system of settling balances is known as the clearing process.

. as well as other items destined for collection become the subject of interbank settlements .INTERNATIONAL drafts. letter of credit. banker's FINANCE acceptance.

. .an association on banks that agree to contribute to the expenses of interbank settlements of items for exchange or collection to minimize efforts and provide safe measures Clearing means it will be ascertained whether or THE CLEARING HOUSE not the cheques or drafts have funds to back them up. The process of clearing checks begins from the time the banks' representatives leave their respective banks up to their return after having exchanged the checks and the proper entries are made in their books.

. or certificate of authority granted by the Bangko (PCHC) Sentral. Co-equally owned by the members of the Bankers Association of the Philippines. All Philippine Clearing participants to the PCHC must be banking House Corporation institutions that operate under a charter. Built for the purpose of automating the clearing system of checks and checking transactions.

LETTERS OF CREDIT ‘…the life-blood of international commerce…’ .

. • As far as the payment issue is concerned. distance. uncertainty and lack of confidence among the business actors discourage the global commercial venture. • Fortunately. • The dynamism of the actual economy creates a need for financing that requires a guarantee of payment at a time and for an amount that must be certain. market reality.• Letter of credit transactions have been developed since the middle Ages in connection with the trade of goods at the international level. letter of credit or ‘documentary credit’ or ‘banker’s commercial credit’ has Brought a revolutionary solution to all this problems and has ensured sufficient securities and certainty in payment transaction. geographical barriers.

BANK VS.Letter of Credit engagement b) beneficiary and the applicant (importer/ buyer) . • The broad credit transaction consists of three separate relationships: a) the beneficiary (exporter/ seller) and the issuing bank .Underlying contract c) the buyer and the issuing bank . LETTERS OF CREDIT • The involvement of the bank as a credit institution through the issuance of letters of credit offers an opportunity to finance the import and export of goods.Application agreement or Cover relationship .

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Legal Principles Governing Letter Of Credits .

second and third transactions. o The essence of this principle is that the Letter of Credit transaction (transaction between seller and the issuing bank) is a separate and independent transaction and it is. connected with any other transactions (for example. Principle of Autonomy o one of the fundamental principles of letter of credit. As a result of the autonomy principle. the banks do not deal with the goods.1. . services or performance regarding the underlying contract. no way. as mentioned earlier in introduction part).

The principle of Strict Compliance The presented documents must be in accordance with the terms and conditions of the letter of credit.2. the bank has the obligation to observe the borders of the commission given to it and fulfils the request by observing the principle of strict compliance. Based on the contract between applicant (importer) and issuing bank. . Issuing bank keeps the rejection right when it meets the documents that disobey this principle.

The Red Clause Letters of Credit 6. TYPES OF LETTERS OF CREDIT 1. The Transferrable Letters of Credit . The Back-to-back Letters of Credit 7. The Standby Letters of Credit 4. The Revolving Letters of Credit 5. Confirmed and Unconfirmed Letters of Credit 3. Irrevocable and Revocable Letters of Credit 2.

all the credit conditions. o Therefore. . who disposes compliance by the beneficiary with with absolute flexibility. at will and The issuing bank commits itself without warning or notification. the beneficiary will accept a revocable letter of credit not only when he has absolute trust in the buyer. o can be canceled or amended at any time prior to payment. irrevocably to honor its obligation o All the advantages are to the under the letter of credit upon full benefit of the buyer. Revocable Letter of Credit Irrevocable Letter Of Credit o No form of security. but also when he trusts the issuing bank.

by two entities. the independent of. it is only to act on issuing bank's commitment behalf of the issuing bank for administrative purposes . Confirmed Letter of Unconfirmed Letter of Credit Credit o most secure device because it o offers a commitment to pay only offers an unconditional undertaking on the part of the issuing bank. the advising bank. oWhen the irrevocable letter of o the advising bank enters into a commitment to pay that is credit involves a third bank. in addition to.

• It is often used in sales transactions to provide the buyer with a guarantee of performance by the seller. thus providing the same service as the performance bond.The Standby Letters of Credit • Specialized types of letter of credit is designed to provide efficiency to certain transactions. .

• Used in multiple shipments. • This form of letter of credit is adopted in cases of transactions involving shipment of goods on a continuing basis and payment of the total price in multiple installments of similar amounts. . The Revolving Letter of Credit.

Usually it is applied to the benefit of brokers or dealers. who often do not dispose of the amounts necessary to finance the deal. . • It is a form of financing representing a non collateralized loan to the beneficiary.The Red Clause Letters of Credit • The beneficiary is provided with the right to draw certain amounts of money prior to the execution of his obligation.

letter of credit or as financing device. unrelated. In this case. it is the bank.The Back-to-back Letters of Credit • It is used as a basis for the issuance of a second. and not the customer. • the beneficiary who needs to provide guarantees to a third party may pledge the letter of credit to a bank as collateral for the issuance of a second letter of credit. that trusts the beneficiary of the first letter of credit and believes that he will comply with the obligations of the first letter of credit. . as in the case of the red clause credit.

and an intermediary party. such as a broker.The Transferrable Letters of Credit • It is used in cases where there are three parties to a transaction. wants assurance from the intermediary party that payment will be made. the intermediary party requests a Letter of Credit from the Importer as protection against non-payment. The Exporter. . Exporter (Supplier). who is responsible for arranging the sale. in turn. and will also request a Letter of Credit. an Importer (Buyer). • In such a transaction.

THE FUNCTION .

WHAT IS A ? It is a legal arrangement in which individual (trustor) gives an authority to control the property to a person or an institution (trustee) for the benefit of the beneficiaries. while implied trusts come into by operation of law. Trusts are either express or implied. Express trusts are created by the intention of the trustor. .

HOW DOES IT WORK? .

if any. shall be exclusively for the account of the trustor and/or beneficiaries unless directly caused by gross negligence of the Trustee. term and regular deposits only).CHARACTERISTICS OF A TRUST • It is fiduciary in nature • It is a relationship with respect to property. • Trust accounts are not covered by the Philippine Deposit Insurance Corporation(PDIC) and losses. . Certain placements/investments may be covered by PDIC (i. not one involving merely personal duties. • It involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another.e.

BANK’s TRUST DEPARTMENT .