chapter 5 credit instrument negotiable and non negotiable.pptx

all non negotiable instruments with features

1. http://www.free-powerpoint-templates-design.com CREDIT INSTRUMENTS Chapter-5

2. Definition Credit Instruments a document ( as cheque, letter of  credit , or bond) other than paper money that evidences a debt.

3. Negotiable Non- Negotiable Types of Credit Instruments A transferable , signed document that promises to pay the bearer a sum of money at a future date or on-demand. A written and signed document that gives a particular person or entity the right of payment for a specified sum of money, but which cannot be transferred to another person or exchanged for cash by another person.

4. Non-Negotiable Instruments I Owe You (IOU) Bill of Lading Deposit Receipt Share Certificate Letter of Credit (LC) Credit card, Debit card and ATM

5. I am your debtor I am liable to pay you I owe You Features Nature: Written evidence of debt drawn and signed by debtor Creditor: Drawn in the name of creditor Non-Negotiable: Drawn for fixed amount Date and stamp: does not have any date and revenue stamp

6. a  stock certificate  (also known as  certificate  of  stock  or share  certificate ) is a legal document that certifies ownership of a specific number of  shares  or  stock  in a corporation. Features Issuance : Issued by limited Companies Evidence: Proof that the particular person has share in Co. Non-Negotiable: It can not be transferable. Sale and Purchase: can be purchased and sold in capital market. Stock Certificate

7. Document Non-Negotiable: Nature Evidence Bill of Lading a detailed list of a ship's cargo in the form of a receipt given by the master of the ship to the person consigning the goods. It contains or evidences the terms of the contract of carriage; it is a conclusive receipt, i.e. an acknowledgement that the goods have been loaded; It can not be transferable. It serves as a document of title to the goods, subject to the nemo dat rule

8. A debit card is a plastic payment card that can be used instead of cash when making purchases. It is similar to a credit card, but unlike a credit card, the money is immediately transferred directly from the cardholder's bank account when performing any transaction A credit card is a payment card issued to users to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. An ATM card is a payment card or dedicated payment card issued by a financial institution which enables a customer to access their financial accounts via it’s and other’s automated teller machines and to make approved point of purchase retail transactions ATM cards are not credit cards or debit cards

9. 01 02 03 Deposit Receipt is a  non - negotiable instrument.  A  deposit slip  contains the date, the name of the depositor, the depositor's account number, and the amounts being  deposited  as well as break down of whether the  deposit  is comprised of checks, cash, or if the depositor wants a specific amount of cash back from a check  deposit ..

10. Letter of Credit (LC) a letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions. A letter of credit, also known as a documentary credit or bankers commercial credit, or letter of undertaking, is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.

11. Parties of LC

12. 1) Account Party: The buyer as the importer on whose request the letter of credit is open is known as Account Party. 2) Issuing Bank/Buyer’s Bank: The bank of importer who open the letter of credit is known as issuing bank. 3) Exporter or Seller/ beneficiary: The seller is the party in whose favour letter of credit is opened is known as third party or beneficiary. 4) Paying or negotiating bank: The Bank in the country of the exporter or seller on which the draft is drawn is called Paying or Negotiating bank.

13. Opening of LC

14. Application for letter of credit: The importer is to get himself registered with export promotions bureau, ensures the membership of trade body then approach the authorized bank for registration. The importer is required to fill the application available with the bank on the prescribed form. 2) Scrutiny of the application: Before issuing the letter of credit, the bank take all necessary precautions in order to secure its credit. The bank examines the credit worthiness of applicants, the type of the goods to be imported the collateral securities offered to cover the credit and the market demand of the goods in order to determine the amount of credit which would be made available to the importer for letter of credit. 3 ) Cash Margin: The importer is asked by his bank to deposit cash or securities before a letter of credit is open, the amount of cash or security to be offered by the importer depends upon his credit standing. The bank decide the percentage margin on the security which must be kept with the bank.

15. 4) Opening of the letter of credit: After complete scrutiny of application, if the bank gets satisfied with all the documents and details are provided by the importer then bank opens the letter of credit in the favor of exporter on the behalf of the importer. 5) Handling of documents: When a letter of credit is received by exporter then after shipping the goods he presents the required documents and the drafts to the bank in his own country. If the bank is satisfied with the submitted documents then it negotiates the same with the bank in importer’s country. The bank of the importers before making the payment of the draft submitted by negotiating bank will find that required conditions are fulfilled or not. 6) Payments by the importer to the bank: The bank does not lend money to the importer when it open LC on his behalf, in fact the bank makes the contract with the importer that when the draft is send by the negotiating bank then the importer will make the payment not later than the date on which the bank has to honor the obligations. 7) Liability of the issuing bank: The liability of bank honoring the letter of credit is to examine the documents in order to determine whether they actually confirmed to the letter of credit. If documents appear to be in order the payment should be made otherwise in case of any defect the issuing bank which has honored the draft, may be required to pay damages to the importer if he files a claim.

16. Infographic Style Revocable LC Such letter of credit can be cancelled by the issuing bank at any time without giving any notice. Irrevocable LC It is letter of credit where the issuing bank gives an undertaking that it will honour the draft presented by the negotiating bank provided that the term & conditions of letter of credit are fulfilled. Such letter of credit cannot be cancelled without the consent of all the parties and gives full protection to the exporter. Clean LC No Condition attached to the bill and exporter has no need to deposit any documents to get his money. Documentary LC Draft accompanied by different documents relating to the merchandize e.g. bill of lading, invoice, and insurance Confirmed LC Such letter of credit is under the protection of the credit worthiness of both the importer and exporter bank. Under such letter of credit the negotiating bank gives absolute undertaking that exporter will be paid if the importer’s bank fails to make payment. Such letter of credit is usually used when: The issuing bank don’t have sound standing. The conditions in the issuing bank’s country are shaky and doubtful. The issuing bank is not known. . Unconfirmed LC Types of LC Under such letter of credit the negotiating bank does not give any guarantee of making the payment to the exporter that the bills drawn will be honored by issuing bank. It is the commitment of the issuing bank to honor the drafts and from the exporter point of view, it is the best form of receiving payment.

17. Infographic Style Red Clause LC Under such letter of credit the issuing bank authorize the negotiating bank to provide finance to the exporter so that he can purchase goods for shipments. Green Clause LC This letter of credit, permits provision of finance for pre shipment of goods and it is also provided for storage and warehouse charges. . Under such letter of credit, the time and amount of credit both are fixed. It does not need to be renewed during the period of validity and whenever during the period bill is paid the credit is automatically available for the full amount. When the letter of credit is issued for a fixed amount up to which the issuing bank is liable is known as fixed letter of credit. Types of LC Revolving LC Fixed LC Transferable LC This letter of credit is the one where the beneficiary has the right to request the paying bank to make the credit available to one or more parties in full or in part. . Back to Back LC The original buyer request his bank to issue the first documentary letter credit to the seller who is middlemen and then on the basis of the first document seller request his bank to issue a separate documentary credit in favour of actual supplier. On the receipt of this back to back letter of credit, the actual supplier sends the goods and receives the payment. Non-Transferable Letter of credit: In this letter of credit, the beneficiary has no right to request the paying bank to make the credit available to any other person. With Recourse It is an ordinary letter of credit, where the issuing bank is liable to make the payment to the seller or exporter if the buyer or importer refuses to make the payment. Without Recourse The issuing bank is not liable to make the payment to exporter or seller if the buyer refuses to make the payment.

18. IMPORTANCE of letter of credit The bank charge commission on providing the finance for the foreign trade in the form of letter of credit. Major benefits can be discussed as below: Benefits to Banker Increased Balances: No doubt, bank charges low commission but they off sets this by maintaining balances up to the line of credit so that the drawings of the exporters are met under credit. The balances of course are the life blood of every commercial bank. 2) Commission: Through the commission is small but amount of commission thus vary with the type of letter of credit, therefore when counted together it provides a significant earning to the bank. 3 ) New Business Opportunities: The letter of credit enables the bank to come into contact with new business organizations and thus establish profitable relation with them.

19. IMPORTANCE of letter of credit B) BENEFITS TO EXPORTER Provision Of Finance: The exporter can obtain necessary finance on providing the documents to the negotiating banks, not required to wait till the money is received from the importer. 2) Credit Standing: By proper delivery of goods and documents the exporter can establish its credit standing both on the importer bank and negotiating bank. 3) Legal Right: The exporter getting letter of credit in his favor acquires legal rights to get the payment for the goods exported.

20. IMPORTANCE of letter of credit C) BENEFITS TO IMPORTER 1) Risk Coverage: By opening LC the buyer is saved from making the payment before receiving the goods. 2) Business Expansion: Letter of credit facilitate overseas business by providing the facility of making the payment of goods easy. 3) Bridges Credit Gulf: It helps the importer and exporter to rely on the credit standing of each other. Thus bridges the credit gulf between the two. 4) Payment In Currency: The importer pay this for the goods received in the currency of his own country and not required to get into the difficulties of arranging the foreign currencies of gold.