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Credit means lending money on trust. All money is credit. Defined as any item agreed upon that can be used as currency Generally in use are cheques, bills of exchanges, bank overdraft ,credit card etc. Any item can serve as a credit instrument, as long as both parties have agreed on the use of that instrument Ever popular due to convenience
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A written evidence of the existence of an obligation on the part of the debtor, or a claim on the part of the creditor Shows the degree of risk that confronts the creditor with respect to the collection of the debt Shows the nature of the debtor-creditor relationship

Enables the creditor to hold the host instrument to collect from his debtor Debtor is protected of his rights with respect to the amount of the obligation, interest and maturity date Facilitate exchange transactions Minimize disputes among the contracting parties Instrument facilitates production and consumption
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Negotiable Instruments Non-negotiable instruments

A cheque promissory note and a bill of exchange which are payable to the bearer of the instrument or the person to be ordered A document guaranteeing the payment of a specific amount of money, either on demand, or at a set time Unconditional, written and is to be payable on demand or the period for the payment which is determined

Four primary commercial types of negotiable instruments are: 1) Promissory note 2) Bills of Exchange 3) Open Book Account 4) Check

An unconditional promise in writing made by one person to another Referred to as a note

A non-interest-bearing written order Used primarily in international trade Binds one party to pay a fixed sum of money to another party at a predetermined future date Can be drawn by individuals or banks and are generally transferable by endorsements

If bills are issued by

A bank-bank drafts An individual-trade drafts

If drawn on
A person, firm or corporation-trade bills A banking institution-bankers' bills

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Most elementary type of credit instrument Means of recording or measuring credit

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Earliest forms of a credit instrument is the cheque Value of the check is underwritten by funds that are placed in a bank account Utilized by consumers as a legitimate means of paying for goods and services received No longer the main credit instrument employed

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Cannot be transferred or the documents which are restricted to transfer by the issuer Examples: Money order Postal order Shares certificate

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A payment order for a pre-specified amount of money Purchased for the amount desired Commonly used for transferring funds to a payee who is in a remote, rural area The most economical way of sending money in india for small amounts

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Used for sending money through the mail Not legal tender A type of promissory note Similar to a cheque

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Credit Instruments with General Acceptability Credit Instruments with Limited Acceptability

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Pass from hand to hand without question as to their source Possess the characteristics of money Only credit instrument of general acceptability is credit money (bank notes, treasury certificates)

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Constitutes future claims of a valuable item against an entity. The holder use it to purchase goods and services Credit money is made of a material that has low intrinsic value Forms of credit money are IOUs, bonds and money market accounts Any form of financial instrument that cannot be repaid immediately is considered credit money
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CREDIT MONEY QUALITIES 1) Must be issued by a promissory in whom all the people have confidence 2) Must be in convenient denominations 3) Easily recognizable 4) Must be difficult to counterfeit

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Acceptance will depend on the credit standing of the issuer or maker. Subdivided into two types: instruments for investment purpose and instruments for commercial purpose. Accepted only by few

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These are subdivided into stock certificates, bond certificates and money market bills Stock Certificates:legal document that certifies ownership of a specific number of shares of stock in a corporation.Two forms:
bearer stock certificates entitles the holder to exercise all legal rights associated with the stock they are rarely seen in practice
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registered stock certificates evidence of title, and a record of the true holders of the shares will appear in the stockholder's register of the corporation

Degree of negotiability depends on whether or not it is registered Registered bond is payable only to the party whose name is designated on the instrument and recorded on the books of the corporation. It can be transferred only by the endorsement of the payee Interest on the registered bond is paid directly to the party specified Unregistered bond is more readily transferred Interest given to any holder of the coupons attached to the instrument, so usually called a coupon bond.
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Bond certificates Promise written in a formal manner, for it is always under seal It is a promise by the maker to pay interest and principal at a designated time in the future The maker is usually a government or a corporation Bears a fixed rate of interest which is generally payable semi annually. May be either secured or unsecured
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Subdivided into two types as Promise-to-pay instrument and Order-to-pay instrument. 1. Promise-to-pay Instruments:

Promissory notes Open book accounts

2. Order-to-pay Instruments
Bill of exchange Cheque

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A payment card issued to users as a system of payment. Allows cardholder to pay for goods and services based on the holder's promise to pay for them. Issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider

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Credit card user is obligated to repay the credit card company. Companies charge high interest rates on credit card balances Grace usually range from 20 to 55 days Good for short-term borrowing of small amounts

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Defined as an electronic store of monetary value on a technical device that may be widely used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument. Operations are card based (electronic purses, pre-charged cards, chip cards, contactless cards) or software based products.

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Electronic money products use cryptography to authenticate transactions and to protect the confidentiality and the integrity of data No longer needs to be physically exchanged More easily used for remote payments Cannot be used again Promise of vastly increasing payments traffic through this channel, particularly in the consumer space

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The foreign exchange operations of banks consist primarily of purchase and sale of credit instruments They differ in speed with which money can be received by the creditor at the other end Different rates of exchange applicable to different types of credit instruments.

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Order for the payment of money sent by telegraph or cable. Customer pays money to the bank in the currency of his country and the bank informs its foreign correspondent through currency to a designated payee A system of private codes by which the genuineness of the instruction can be tested

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Quickest method of transferring money No gain or loss of interest No risk of loss of the instrument in transit Used by banks for transfer of funds from one center to another for short term investment Payment within the next 24 hours, excluding bank holidays and no stamp duties are to be fixed on such transfers

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An order by a bank to its correspondent bank but the instructions are sent by mail Takes longer time to reach destinations Some time elapses between the purchaser and payee Loss of interest to the purchaser A gain of interest for the bank When the customer does not require the use of foreign currently immediately, an MT is quite suitable. An m.T is like cheque but not negotiable or transferable
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A draft or a cheque is drawn by a bank of its foreign correspondents or an office at the centre where the payment is to be made, and is remitted by the buyer to one to whom the payment is to be made. The buyer pays the required sum to the bank, gets the draft, and sends it to the payee Draft may be drawn in the currency of the country of the payee

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Drawing of personal cheques in foreign currency by resident indians is not permitted Needs specified approval of RBI Can be received by him or drawn by a nonresident from his bank account overseas, the proceeds of which can be collected and credited to the account of a resident indian

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Convenient mean of international trade finance. Certificate issued by bank, based on account holding that applicant will be paying the beneficiary the amount denoted in letter The letter is being pursued as a much safer option than making an advance payment To ensure the security of transactions financial instruments are employed: forfeiting and hedging Other instruments include export credit insurance and export credit guarantee The unsafe methods of payment guarantees include advance payment and open accounts.
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Wholesale transactions are completed by the passing of instruments of credit or negotiable paper, as notes, drafts, checks etc. It is the function of banks to deal with these transferable instruments legally called titles Are representative of the property passing by title in money from the producers to the consumers. The trade in instruments of credit amounts to around fifty billions of dollars yearly Pay checks in denominations are mostly used.
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Term drafts means orders drawn upon a bank or by one bank upon another Term bills of exchange used to include drafts Negotiable paper is the usual economic class of credit instrument used by lawyers Negotiability is defined by lawyers as the power to transfer title absolutely and without the necessity of notice incurring liability on the part of the recipient.

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Use of Credit Instruments as a medium or short-term investment is obvious Truly embody the best risk/reward ratio in todays investment marketplace.

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