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After studying this chapter you will be able to understand: Overdraft, discounting of bills, lending policies, evaluation of loan proposals, negotiable instrument.
Revise Lecture 21 Loans and Advances • Overdraft Loans and Advances Overdraft • • • Overdraft also is a credit facility granted by bank A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in it It is a temporary arrangement Loans and Advances Overdraft • • Overdraft facility with a specified limit may be allowed either on the security of assets or on personal security, or both If there is a prior agreement with the account provider for an overdraft protection plan and the amount overdrawn is within this authorized overdraft, interest is normally charged at the agreed rate Loans and Advances Overdraft • • If the balance exceeds the agreed terms, fees may be charged and higher interest rate apply Overdraft is an efficient form of borrowing as the customer pays interest only for the time he uses the money It gives him flexibility Loans and Advances • Discounting of Bills Loans and Advances • • • Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bill after deducting a certain rate as discount The party gets the funds without waiting for the date of maturity of the bills In case any bill is dishonoured on the due date, the bank can recover the amount from the customer Loans and Advances • Lending Policies Loans and Advances Lending Policies • • While lending decisions are crucial for a bank, it is neither feasible nor desirable for the top management to review and clear every single loan proposal that the bank receives Furthermore, for most of the loan proposals, whichever industry they may belong to, the modus operandi remain the same, analyzing, selecting, sanctioning Loans and Advances Lending Policies • • Hence the top management needs to set the standards Standards relating to the exposure limits for individual / company/ industry, credit quality of the borrowers, lending rate, risk level, etc, enable decentralized decision making by the lending officers Lecture 22 • Negotiable Instrument Negotiable Instrument • • The term ‘negotiable instrument’ consists of two parts, viz, ‘negotiable’ and ‘instrument’ The word ‘negotiable’ means ‘transferable by delivery’ and the word ‘instrument’ means ‘written documents by which a right is created in favour of some person’ Negotiable Instrument • • It means an instrument possessing the quality of negotiability is entitled to be called a negotiable instrument In other words, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times before the final payment is made Negotiable Instrument • A negotiable instrument must possess two features; The right of ownership contained in the instrument can be transferred from one person to another by mere delivery if it is payable to bearer, or by endorsement and delivery if payable to order Negotiable Instrument The transferee taking the instrument in good faith and for consideration gets a good title to the same even though the title of the transfer is defective Negotiable Instrument • The essential characteristics of a negotiable instruments are; Payable to order or bearer: • It must be payable either to order or bearer Freely transferable: • An instrument payable to order is negotiable by endorsement and delivery and an instrument payable to bearer is Negotiable Instrument Presumption as to holder: • Every holder of negotiable instrument is presumed to be holder in due course Title of holder in due course: • A holder in due course i.e the person who becomes the possessor of negotiable instrument before maturity, for valuable consideration and in good faith, gets the instrument free from all defects in the title Negotiable Instrument Presumption as to considerations: • Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed, negotiated or transferred for considerations Negotiable Instrument • The main negotiable instruments are;\ Promissory notes Bill of exchange Cheques Negotiable Instrument Promissory notes • • According to the definition; A document of promise in writing by a person to pay a certain sum of money unconditionally to a certain person or according to his order is called promissory note Negotiable Instrument • The characteristic features of a promissory note are; A promissory note must be in writing, duly signed by its maker and properly stamped as per the Pakistan stamp Act It must contain an undertaking or promise to pay The promise to pay must not be conditional It must contain a promise to pay money only The parties to a promissory note, i.e the maker and the payee, must be certain It may be payable on demand or after a certain date The sum payable mentioned must be certain or capable of being made certain It • • A promissory note does not require any acceptance because the maker of the promissory note himself promise to make the payment There are primarily two parties involved in a promissory note; Maker / drawer Drawee /payee Negotiable Instrument • • • In course of transfer of a promissory note by payee and others, the parties involved may be the; The endorser: the person who endorses the note in favour of another person The endorsee: the person in whose favour the note is negotaited by endorsement ... belong to, the modus operandi remain the same, analyzing, selecting, sanctioning Loans and Advances Lending Policies • • Hence the top management needs to set the standards Standards relating to the... potential and vice versa Loans and Advances Lending Policies Geographical Distribution • • While operating in any area, the bank should have the requisite funds and expertise to meet the credit demands... areas and Loans and Advances Lending Policies Geographical Distribution • • There are various locations from where a bank conducts its operations Of these locations, some may be weak credit demand