Page 170 - DMGT303_BANKING_AND_INSURANCE

Unit 8: Negotiable Instruments

Notes
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Caution Term loans are normally granted for periods varying from 3 to 7 years and in
exceptional cases beyond 7 years.

Bill Finance

Advances against Inland Bills are sanctioned in the form of limits for purchase of bills (Bills
Purchase Limit) or discount of bills (Bills Discounting Limit ) or bills sent for collection advance
against bills sent for collection (ABC Limit), to borrowers for their genuine trade transactions.
Bills are either payable on demand or after usance period.
Demand Bills which are payable on demand or at sight, are purchased from the parties who are
sanctioned Bills Purchase limits and Usance Bills which are payable on maturity after a certain
period of time as per terms of contract are discounted for parties who are sanctioned Bills
Discounting limits.

Packing Credit

Packing credit is an advance given to an exporter who holds a Code Number assigned to him by
the Directorate General of Foreign Trade (DGFT), for financing the purchase, processing,
manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in
his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable
order for the export of goods from India or any other evidence of an order for export from India
having been placed on the exporter or some other person, unless lodgement of export orders or
Letter of Credit with the bank has been waived.
Packing credit advances are generally allowed separately for each Letter of Credit/Firm Order
to comply with the guidelines issued by corporate divisions of the concerned banks/Reserve
Bank of India.

Inland Letters of Credit

Letter of credit (LC) is issued by the bank at the request of its customer in favour of a third party
informing him that the Bank undertakes to accept the bills drawn on its customers up to the
amount stated in the LC subject to the fulfilment of the conditions stipulated therein. Therefore,
when the bank issues LC, it assumes responsibility to pay its beneficiary on production of bills
drawn in accordance with the terms and conditions of the LC.

Guarantees

Guarantee is a contract to execute the promise, or discharge the liability of a third person in case
of his default. In the ordinary course of business, the bank often issues guarantees on behalf of
its customers in favour of third parties. When the bank issues such a guarantee, it assumes a
responsibility to pay the beneficiary, in the event of a default made by the customer.

Notes When the bank issues LC, it assumes responsibility to pay its beneficiary on
production of bills drawn in accordance with the terms and conditions of the LC.

Did u know? Temporary clean overdrafts in current accounts are maintained in the ordinary
current account ledgers, today in an electronic form.

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