Credit Instruments

- RICHARD R
CREDIT INSTRUMENTS ?
 Credit Instruments are the documents describing
details of credit and debit. Credit Instruments provide
a written means from future reference describing
terms and conditions of any debt and loan.
 Credit Instruments may be an order for payment of
money to a specified person or it may be a promise to
pay the loan.
 Credit Instruments generally in use are cheques, bills
of exchanges, bank overdraft etc.
KINDS OF CREDIT INSTRUMENTS
 CHEQUE
 PROMISSORY NOTE
 BILL OF EXCHANGE
 BANK DRAFT
 GOVERNMENT BOND
 TREASURY BILLS
#1 CHEQUE
 A cheque is the most common instrument of credit
and almost works like money. It is a written order on a
printed form by a depositor (drawer) to his bank to pay
a sum of” money to himself or to somebody else,
whose name is entered on it, or to the bearer, i.e., the
man who holds it (i.e., drawee).
 According to Section 6 of the Negotiable Instrument
Act, 1881, “A cheque is a bill of exchange drawn upon a
specified banker and payable on demand.”
 From this definition, it is clear that a cheque is a bill of exchange,
but it has the following two additional qualifications:
(i) It is always drawn on a specified banker, and
(ii) It is always payable on demand.
Parties to a Cheque:
i. Drawer:
The drawer is the person who signs the cheque ordering the bank to pay
the amount.
ii. Drawee:
The drawee is a bank on which cheque is drawn.
iii. Payee:
The payee is a person to whom the sum of money expressed in the order is
payable. Sometimes drawer and payee are the same person.
 KINDS OF CHEQUE
1, BEARER CHEQUE
2, ORDER CHEQUE
3, CROSSED CHEQUE
4, POST-DATED CHEQUE
5, BLANK CHEQUE
 BEARER CHEQUE
 Any one, who happens to have the cheque, can get it cashed. In this case, the
bank need not worry as to who presents it at the counter. If a bearer cheque is
lost, the finder can cash it unless the bank is notified in time to stop the
payment. The drawer runs the risk of losing his money, and not the bank.
ORDER CHEQUE
 The word “bearer” after the payee’s name is crossed out, as in the cheque form
below, and the word “order” written instead. It is a safer form of payment,
because the bank is responsible for paying the money to the right person. The
person who presents the cheque at the counter has to prove his identity, before
the proceeds of the cheque can be paid to him
 Crossed Cheque
 This is the safest form of payment as it cannot be cashed .it the
bank counter. The payee cannot get the proceeds of the cheque
in cash, lie can only get the sum transferred to his own or (after
endorsing) to somebody else’s account. A cheque is “crossed” by
drawing two parallel lines across its face or in a corner and
writing the words “& Co.” between them. The specimen given
above is crossed. If it is crossed “Payee’s A/c.”, then cash cannot
be obtained from the bank; the amount of the cheque can only
be credited to the payee’s A/c.
 Post-dated Cheque
 Such a cheque is a way of making payments sometime in the
future. If you have to pay a hundred rupees to a friend after a
month, you may draw a cheque in his favour and put down the
future date. It can be cashed only on or after that date.
 Blank Cheque
 It means an unlimited offer because the signature is
put, whereas the space for the amount is left blank to
be filled in by the drawee
 Nobody ordinarily signs a blank cheque.
#2 PROMISSORY NOTE
 DEFINITION
 A Promissory Note, as the name itself gives a brief
description, is a legal financial instrument issued by one
party, promising to pay the debt owed to another party.
 It is a written negotiable instrument duly signed by the
maker that contains an unconditional promise to pay the
stated sum of money to a particular person or to any other
person, on the order of that particular person, either on
demand or on a specified date, under given terms. It is a
short-term credit instrument which does not amount to a
bank note or a currency note.
Characteristics of Promissory Note
 It is a written document.
 There must be a clear and unconditional promise to
pay a certain sum to a specified person or on demand.
 It must be drawn and duly signed by the maker.
 It must be properly stamped.
 It specifies the name of the maker and payee
 The amount to be paid must be certain, given in both
figures and words.
 Payment is to be made in the country’s legal currency.
Parties to Promissory Note
 1, Drawer: The one who makes the promise to another, to pay the debt is the
drawer of the instrument. He/She is the debtor or borrower.
 2, Drawee: The one, in whose favour the note is drawn is the drawee. He/She is
the creditor who provides goods on credit or lender, who lends money.
 3, Payee: The one, to whom payment is to be made is the payee of the
negotiable instrument.
 The drawee and payee can be the same person when the amount is to be paid to
the person in whose favour the note is drawn. However, when the amount is to
be paid to another person, on the order of the drawee, meaning that if the
drawee transfers the instrument in favour of another person then, in that case,
payee would be different.
 Further, the party that owes money to another party holds the promissory note
and after discharging the obligation completely, the drawee or payee (whatever
the case may be) cancels the note and returns to the drawer.
KINDS OF PROMISSORY NOTES
 1. Simple or Single Promissory Note:
 When a promissory note is made or drawn by one person,
it is called a simple/single promissory note. The maker of
this promissory note is individually liable for the amount.
 2. Joint Promissory Note:
 When a promissory note is made or drawn by two or more
persons, it is called a joint promissory note. The makers of
this promissory note are jointly liable for the payment.
 3. Joint and Several Promissory Note:
 When a promissory note is made by two or more persons
and the makers of the promissory note are liable jointly
and severally, it is called a joint and several promissory
note.
#3 TRADE BILLS
 Credit Instrument # 6. Trade Bills:
 Ordinarily bills are drawn and accepted for the purpose of receiving or making
payments of goods sold or purchased on credit. Such bills, which are drawn for
consideration, are known as Trade Bills.
 1. Purpose:
 It is drawn and accepted for any business transaction.
 2. Proof:
 It is a proof of debt.
 3. Consideration:
 Trade bill is drawn and accepted for some consideration.
 4. Dishonour:
 If this bill is dishonoured, payment can be taken with the help of court.
 5. Discounting of the Bill:
 If such a bill is discounted with the bank, the whole amount of bill remains the
drawer.
# 4 Bill of Exchange
 It is an important part of negotiable instruments used

both in inland and overseas trade.
 According to Negotiable Instruments Act, 1981, “A ‘bill
of exchange’ is an instrument in writing and
containing an unconditional order signed by the
maker, directing a certain person to pay a certain
sum of money only to or to the order of a certain
person or to the bearer of the instrument.”
CHARACTERISTICS
 1. It should be in writing.
 2. It should contain an order to pay
 3. It should have unconditional order.
 4. It must be signed by the drawer.
 5. It must contain amount of money.
 6. All the three parties-drawer, drawee and payee must
be mentioned.
 7. The bill may be made payable on demand or after
specified period of time.
 8. It must bear the required revenue stamp.-
 Parties to a Bill of Exchange:
 There are three parties to a bill of exchange:
 1. Drawer:
 The maker/writer of the bill is called Drawer. He is
generally the creditor.
 2. Drawee:
 The person on whom the bill is drawn is called Drawee. He
is normally the debtor.
 3. Payee:
 The person who is entitled to receive the amount of bill on
its maturity is called Payee. Writer of the bill can be drawer
as well as payee of the bill.

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What are the different types of credit instruments discussed?

What are the key characteristics of a bill of exchange?

- RICHARD R

 It is an important part of negotiable instruments used

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