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:
 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.
 Credit Instruments
The main Instrument of credit

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.
 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

 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
 Parties of Bill of
Exchange
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
 Advantages of Bill of
Exchange
 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.

 Cheque
 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
 Characteristics of
Cheque
 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.
 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
 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 Bill of
exchange
 It is promise to pay  It is order to pay
 Two Parties involve The  Three parties involve
Maker who sign and the The drawer, The
payee Drawee and the payee
 Unconditional promise  Unconditional order to
by the maker to pay the Drawee to pay
 Cannot be made  It can be made to
payable to maker drawer and then have
 Need no acceptance only two party
 Notice of dishonor for  Acceptance is must
non payment is not  Notice is give to all
necessary in case of Pr- person libel to pay.
note
Promissory Note Bill of
Exchange
 The tow parties are  Parties in
immediate relation immediate
the maker and the relation are the
payee drawer and the
 It is not drawn in acceptor.
sets.  It is drawn in
 The liability of the sets.
maker is primary  The liability of
and absolute the drawer of the
bill is secondary
 Bill of Exchange
Cheque  Drawn on some person
 It is drawn on bank or firm including the
 Payable on demand bank
 Does not require  Payable on demand or
acceptance on expiry of a fixed
 No of days grace are period
allowed for payment on  Acceptance is necessary
cheque or immediately before payment can be
paid on demand asked.
 A cheque can be  Three days of grace are
crossed allowed fro payment on a
 Notice of dishonor is time bill of exchange but
not necessary not on demand.
 Cheque is paid on  Crossing of bill is not
demand to bearer is allowed
valid.  Notice of dishonor is
 Payment on cheque can necessary to hold the
parties labile hereon
be stopped buy the
drawer.
 A bill of exchange cannot
drawn payable to bearer
 A cheque is not to be  Payment cannot be
noted or protested in stopped or counter
case of dishonor minded by the drawer.
 A cheque does not  A bill is noted and
require stamp protested to establish
dishonor
 It must be stamp
 The Bank Draft
 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
 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.
 Advances
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
 Primary function of the bank is to advance the
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
 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