Presentment

The written notice taken by a grand jury of any offence, from their own knowledge or observation, without any bill of indictment laid before them at the suit of the government upon such presentment, when ‘proper, the officer emloyed to prosecute, afterwards frames a till of indictment, which is then sent to the grand jury, and they find it to be a true bill. In an extended sense presentments include not only what is properly so called, but also inquisitions of office, and indictments found by a grand jury.

The difference between a presentment and an inquisition, is this, that the former is found by a grand jury authorized to inquire of offences generally, whereas the latter is an accusation found by a jury specially returned to inquire concerning the particular offence. The writing which contains the accusation so presented by a grand jury, is also called a presentment.

In general the presentment for payment should be made to the maker of a note, or the drawee of a bill for acceptance, or to the acceptor, for payment; but a presentment made at a particular place, when pavable there, is in general sufficient. A personal demand on the drawee or acceptor is not necessary; a demand at his usual place of residence of his wife or other agent is sufficient.

When a bill or note is made payable at a particular place, a presentment, as we have seen, may be made there; but when the acceptance is general, it must be presented at the house or place of business of the acceptor.

In treating of the time for presentment, it must be considered with reference to:

  • A presentment for acceptance
  • One for payment

When the bill is payable at sight, or after sight, the presentment must be made in reasonable time; and what this reasonable time is depends upon the circumstances of each case. The presentment of a note or bill for payment ought to be made on the day it becomes due, and notice of non-payment given, otherwise the holder will lose the security of the drawer and endorsers of a bill and the endorsers of a promissory note, and in case the note or bill be payable at a particular place and the money lodged there for its payment, the holder would probably have no recourse against the maker or acceptor, if he did not present them on the day, and the money should be lost.

The excuses for not making a presentment are general or applicable to all persons, who are endorsers; or they are special and applicable to the particular’ endorser only. Among the former are:

  • Inevitable accident or overwhelming calamity
  • The prevalence of a malignant disease, by which the ordinary operations of business are suspended
  • The breaking out of war between the country of the maker and that of the holder
  • The occupation of the country where the note is payable or where the parties live, by a public enemy, which suspends commercial operations and intercourse
  • The obstruction of the ordinary negotiations of trade by the vi’s maj or
  • Positive interdictions and public regulations of the state which suspend commerce and intercourse
  • The utter impracticability of finding the maker, or ascertaining his place of residence

Among the latter or special excuses for not making a presentment may be enumerated the following:

  • The receiving the note by the holder from the payee, or other antecedent party, too late to make a due presentment; this will be an excuse as to such party
  • The note being an accommodation note of the maker for the benefit of the endorser
  • A special agreement by which the endorser waives the presentment
  • The receiving security or money by an endorser to secure himself from loss, or to pay the note at maturity. In this case, when the indemnity or money is a full security for the amount of the note or bill, no presentment is requisite
  • The receiving the note by the holder from the endorser, as a collateral security for another debt

A want of presentment may be waived by the party to be affected, after a full knowledge of the fact.

Presentment for Acceptance

A bill of exchange is a negotiable instrument in writing containing an unconditional order, directing a certain person to pay a certain amount only to or to the order of a certain person or to the bearer. The drawer is the person who draws the bill and presents it to the drawee for acceptance. Out of all the negotiable instruments, only bills of exchange require presentment for acceptance.

All kinds of bills of exchange do not require presentment for acceptance. Bills payable on demand or on a fixed date do not require this. However, the following bills require presentment for acceptance in the absence of which the parties to it will not be liable on it:

  • Bill payable after sight in order to fix the maturity of the bills.
  • A bill that consists of an express stipulation that presentment for acceptance is necessary before presentment for payment.

As per section 15, the presentment for acceptance shall be made to the drawee or his duly authorized agent, in case of drawee’s death to his legal representative and in case of his insolvency to his official receiver or assigner.

We shall present the bill to the following persons:

  • Drawee or his duly authorized agent.
  • In case of more than one drawee, to all the drawees.
  • In the case of drawee’s death, to his legal representative.
  • Where the drawee becomes insolvent, to his official receiver.
  • When the original drawee refuses to accept the bill, to a drawee in case of need.
  • The acceptor for honour.

The presentment for acceptance shall be done before maturity, within a reasonable time after it is drawn, on a business day during business hours at a business place or residence of the drawee.

Right and Liabilities of Paying and Collecting Banker

The following are the rights of a collecting banker:

  1. The banker should present the cheque to the paying banker for encashment within a reasonable time. What is reasonable time depends upon the facts of each case. As per the prevailing practice, the collecting banker should present the cheques received for collection from customers at least by the following or next day after he receives it. Any undue delay in collection would render the banker liable to the customer for any loss the latter may suffer on account of the delay.
  2. If the cheque presented in clearing is realized, then the proceeds of the realized cheque should be credited to the account of the customer without any delay.
  3. In case the cheque sent for collection is dishonoured by the drawee bank, the collecting bank should return the cheque to the customer within a reasonable time so as to enable the customer to recover the amount of the cheque from parties liable thereto. If he fails to send the notice of dishonour of the cheque to the customer within a reasonable time and the customer suffers a loss as a consequence of the omission to send the notice, the collecting banker becomes liable to compensate the customer.

The Following are the rights and duties of a collecting banker.

  • Cheque crossed generally be paid only to banker
  • A cheque crossed specially should be paid only to through banker
  • Second special crossing in favour of the banker
  • A banker cannot ignore the crossing

Liabilities of Paying Banker

  1. Proper Form

A banker should see whether the cheque is in the proper form. That means the cheque should be in the manner prescribed under the provisions of the commercial code. It should not contain any condition.

  1. Open or Crossed Cheque

The most important precaution that a banker should take is about crossed cheques. A banker has to verify whether the cheque is open or crossed. He should not pay cash across the counter in respect of crossed cheques. If the cheque is a crossed one, he should see whether it is a general crossing or special crossing. If it is a general crossing, the holder must be asked to present the cheque through some banker. It should be paid to a banker. If the cheque bears a special crossing, the banker should pay only the bank whose name is mentioned in then crossing. If it is an open cheque, a banker can pay cash to the payee or the holder across the counter. If the banker pays against the instructions as indicated above, he is liable to pay the amount to the true owner for any loss sustained. Further, a banker loses statutory protection in case of forged endorsement.

For example, Madras Bank Ltd. Vs South India Match Factory Ltd., a cheque was issued by a purchaser in favour of the official liquidator of a company towards the purchase price of certain properties. The bank paid the amount of the crossed cheque to the liquidator across the counter. The liquidator mis-appropriated the amount. The court held that the banker committed breach of statutory duty and was negligent in paying direct to the liquidator over the counter and hence, was not entitled to legal protection.

If it is a ‘Not Negotiable’ crossing, the paying banker has to verify the genuineness of all the endorsements. If it is an ‘Account Payee’ crossing, the banker can credit the account of the payee named in the cheque and not that of any other person.

  1. Place of Presentment of Cheque

A banker can honour the cheques provided it is presented with that branch of the bank where the drawer has an account. If the cheque is presented at another branch of the same bank, it should not be honoured unless special arrangements are made by the customer in advance. The reasons are:

  • A banker undertakes to pay cheques only at the branch where the account is kept.
  • The specimen signature of the customer will be with the office of the bank at which he has an account.
  • It is not possible for other branches to know that the customer has adequate balance to meet the cheque.

Bank of India Vs Official Liquidator: In this case, it was held that if customer has an account in a bank which has several branches, the branches at which he has no account are justified in refusing to honour his cheques.

  1. Date of the Cheque

The paying banker has to see the date of the cheque. It must be properly dated. It should not be either a post-dated cheque or a stale-cheque. If a cheque carries a future date, it becomes a post-dated cheque. If the cheque is presented on the date mentioned in the cheque, the banker need not have any objection to honour it. If the banker honours a cheque before the date mentioned in the cheque, he loses statutory protection. If the drawer dies or becomes insolvent or countermands payment before the date of the cheque, he will lose the amount. The undated cheques are usually not honoured.

A stale cheque is one which has been in circulation for an unreasonably long period.

The custom of bankers in this respect varies. Generally, a cheque is considered stale when it has been in circulation for more than six months. Banker does not honour such cheques. However, banker may get confirmation from the drawer and honour cheques which are in circulation for a long time. So, verification of date is very important.

  1. Mutilated Cheque

The banker should be careful when mutilated cheques are presented for payment. A cheque is said to be mutilated when it has been cut or torn, or when a part of it is missing. Mutilation may be either accidental or intentional.

If it is accidental, the banker should get the drawer’s confirmation before honouring it. If it is intentional, he should refuse payment. The cheque is to be returned with a remark ‘Mutilated cheque’ or ‘Mutilation Requires Confirmation’. In Scholey Vs Ramsbottom, the banker was held liable for wrong payment of a cheque which was dirty and bore visible marks of mutilation.”

  1. Words and Figures

The amount of the cheque should be expressed in words, or in words and figures, which should agree with each other. When the amount in words and figures differ, the banker should refuse payment. However, there is difference between the amount in words and figures; the amount in words is the amount payable. If the banker returns the cheque, he should make a remark ‘amount in words and figures differ.

  1. Alterations and Overwritings

The banker should see whether there is any alteration or over-writing on the cheque. If there is any alteration, it should be confirmed by the drawer by putting his full signature. The banker should not pay a cheque containing material alteration without confirmation by the drawer. The banker is expected to exercise reasonable care for the detection of such alterations.

Otherwise, he has to take risk. Material alterations make a cheque void.

  1. Proper Endorsements

Cheques must be properly endorsed. In the case of bearer cheque, endorsement is not necessary legally. In the case of an order cheque, endorsement is necessary. A bearer cheque always remains a bearer cheque. The paying banker should examine all the endorsements on the cheque before making payment. They must be regular. But it is not the duty of the paying banker to verify the genuineness of the endorsements, unless the cheque bears ‘Not-Negotiable’ crossing. He is not expected to know the signatures of all payees. So he gets statutory protection in case of forged endorsements. In India, even in the case of bearer cheques, bankers insist on endorsement though it is not required.

  1. Sufficiency of Funds

The banker should see whether the credit balance in the customer’s account is sufficient to pay the cheque or not. If there is an overdraft agreement, he should see that the limit is not exceeded. The banker should not make part-payment of the cheque. He should pay either full amount or refuse payment. In case of insufficiency of funds, the banker should return the cheque with the remark ‘No Funds’ or ‘Not Sufficient Funds’.

  1. Verification of Drawer’s Signature

The banker takes specimen signatures of his customers’ at the time of opening the account. He should compare the drawer’s signature on the cheque with the specimen signature of the customer. He should carefully examine the signature to find out whether the drawer’s signature is forged or not. If there is any difference or doubt, he should not honour the cheque. He should get the confirmation of the drawer. If there is forgery and there is negligence on the part of the banker to detect the same, there is no protection to the banker.

Liabilities of Collecting Banker

  1. Due Care and Diligence in the Collection of Cheques

The collecting banker is bound to show due care and diligence in the collection of cheques presented to him.

In case a cheque is entrusted with the banker for collection, he is expected to show it to the drawee banker within a reasonable time. A cheque is not presented for payment within a reasonable time of its issue, and the drawer or person in whose account it is drawn had the right, at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage, through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a large amount than he would have been if such cheque had been paid.

In case a collecting banker does not present the cheque for collection through proper channel within a reasonable time, the customer may suffer loss. In case the collecting banker and the paying banker are in the same bank or where the collecting branch is also the drawee branch, in such a case the collecting banker should present the cheque by the next day. In case the cheque is drawn on a bank in another place, it should be presented on the day after receipt.

  1. Serving Notice of Dishonor

When the cheque is dishonored, the collecting banker is bound to give notice of the same to his customer within a reasonable time. It may be noted here, when a cheque is returned for confirmation of endorsement, notice must be sent to his customer. If he fails to give such a notice, the collecting banker will be liable to the customer for any loss that the customer may have suffered on account of such failure.

Whereas a cheque is returned by the drawee banker for confirmation of endorsement, it is not called dishonor. But in such a case, notice must be given to the customer. In the absence of such a notice, if the cheque is returned for the second time and the customer suffers a loss, the collecting banker will be liable for the loss.

  1. Agent for Collection

In case a cheque is drawn on a place where the banker is not a member of the ‘clearing-house’, he may employ another banker who is a member of the clearing-house for the purpose of collecting the cheque. In such a case the banker becomes a substituted agent.  An agent, holding an express or implied authority to name another person to act in the business of the agency has accordingly named another person, such a person is a substituted agent. Such an agent shall be taken as the agent of a principal for such part of the work as is entrusted to him.

  1. Remittance of Proceeds to the Customer

In case a collecting banker has realized the cheque, he should pay the proceeds to the customer as per his (customer’s) direction. Generally, the amount is credited to the account of the customer on the customer’s request in writing; the proceeds may be remitted to him by a demand draft. In such circumstances, if the customer gives instructions to his banker, the draft may be forwarded. By doing so, the relationship between principal and agent comes to an end and the new relationship between debtor and creditor will begin.

  1. Collection of Bills of Exchange

There is no legal obligation for a banker to collect the bills of exchange for its customer. But, generally, bank gives such facility to its customers. In collection of bills, a banker should examine the title of the depositor as the statutory protection.

Thus, the collecting banker must examine very carefully the title of his customer towards the bill. In case a new customer comes, the banker should extend this facility to him with a trusted reference.

From the above discussion, there is no doubt to say that the banker is acting as a mere agent for collection and not in the capacity of a banker. If the customer allows his banker to use the collecting money for its own purpose at present and to repay an equivalent amount on a fixed date in future the contract between the banker and the customer will come to an end.

Present Value, Functions

Present Value (PV) concept refers to the current worth of a future sum of money or stream of cash flows, discounted at a specific interest rate. It reflects the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

PV = FV / (1+r)^n

where

FV is the future value,

r is the discount rate,

n is the number of periods until payment.

This concept is essential in finance for assessing investment opportunities and financial planning.

Functions of Present Value:

  • Valuation of Cash Flows:

PV allows investors and analysts to evaluate the worth of future cash flows generated by an investment. By discounting future cash flows to their present value, stakeholders can determine if the investment is financially viable compared to its cost.

  • Investment Decision Making:

In capital budgeting, PV is crucial for assessing whether to proceed with projects or investments. By comparing the present value of expected cash inflows to the initial investment (cost), decision-makers can prioritize projects that offer the highest returns relative to their costs.

  • Comparison of Investment Alternatives:

PV provides a standardized method for comparing different investment opportunities. By converting future cash flows into their present values, investors can effectively evaluate and contrast various investments, regardless of their cash flow patterns or timing.

  • Financial Planning:

Individuals and businesses use PV for financial planning and retirement savings. By calculating the present value of future financial goals (like retirement funds), individuals can determine how much they need to save and invest today to achieve those goals.

  • Debt Valuation:

PV is essential for valuing bonds and other debt instruments. The present value of future interest payments and the principal repayment is calculated to determine the fair market value of the bond. This valuation helps investors make informed decisions about purchasing or selling bonds.

  • Risk Assessment:

Present Value helps in assessing the risk associated with investments. Higher discount rates, which account for risk and uncertainty, lower the present value of future cash flows. This relationship allows investors to gauge the risk-return trade-off of different investments effectively.

Future Value, Functions

Future Value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth in the future. Knowing the future value enables investors to make sound investment decisions based on their anticipated needs.

FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments. The amount of growth generated by holding a given amount in cash will likely be different than if that same amount were invested in stocks; so, the FV equation is used to compare multiple options.

Determining the FV of an asset can become complicated, depending on the type of asset. Also, the FV calculation is based on the assumption of a stable growth rate. If money is placed in a savings account with a guaranteed interest rate, then the FV is easy to determine accurately. However, investments in the stock market or other securities with a more volatile rate of return can present greater difficulty.

Future Value (FV) formula assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment. The FV calculation can be done one of two ways depending on the type of interest being earned. If an investment earns simple interest, then the Future Value (FV) formula is:

  • Future value (FV) is the value of a current asset at some point in the future based on an assumed growth rate.
  • Investors are able to reasonably assume an investment’s profit using the future value (FV) calculation.
  • Determining the future value (FV) of a market investment can be challenging because of the market’s volatility.
  • There are two ways of calculating the future value (FV) of an asset: FV using simple interest and FV using compound interest.

Functions of Future Value:

  • Investment Growth Measurement:

FV is used to calculate how much an investment will grow over time. By applying a specified interest rate, investors can estimate the future worth of their initial investments or savings, helping them understand the potential returns.

  • Retirement Planning:

FV plays a critical role in retirement planning. Individuals can determine how much they need to save today to achieve a desired retirement income. By calculating the future value of regular contributions to retirement accounts, they can set realistic savings goals.

  • Loan Repayment Calculations:

For borrowers, FV is crucial in understanding the total amount owed on loans over time. It helps them visualize the long-term cost of borrowing, including interest payments, aiding in budgeting and financial decision-making.

  • Comparison of Investment Opportunities:

FV provides a standardized way to compare different investment options. By calculating the future value of various investment opportunities, investors can evaluate which options offer the highest potential returns over a specified period.

  • Education Funding:

Parents can use FV to plan for their children’s education expenses. By estimating future tuition costs and calculating how much they need to save now, parents can ensure they accumulate sufficient funds by the time their children enter college.

  • Inflation Adjustment:

FV helps investors account for inflation when planning for future expenses. By incorporating an expected inflation rate into future value calculations, individuals and businesses can better estimate the amount needed to maintain purchasing power over time.

Loan Amortization

An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment reduces the principal. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation.

How an Amortized Loan Works?

Interest is calculated based on the most recent ending balance of the loan and the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortization loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan.

An amortized loan is the result of a series of calculations. First, the current balance of the loan is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.) Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period.

The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan minus the amount of principal paid in the period results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period.

Amortized Loans vs. Balloon Loans vs. Revolving Debt and Credit Cards

Here’s how you can tell these three loan types apart. When you’re taking out a loan, be sure you’re getting the kind you need.

  • Amortized loans are generally paid off over an extended period of time by equal amounts for each payment period. However, there is always the option to pay more and thus further reduce the principal owed.
  • Balloon loans, on the other hand, typically feature a relatively short term and only a portion of the loan’s principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is large, generally, at least double the amount of previous payments.
  • Revolving debt and credit cards don’t have the same features as amortized loans since they don’t have set payment amounts or a fixed loan amount.

Points

  • An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest.
  • An amortized loan payment first pays off the interest expense for the period while the remaining amount reduces the principal.
  • As the interest portion of the payments for an amortization loan decreases, the principal portion increases.

Right and Liabilities of Parties

Right of Parties

  • Conduct of business
  • Can express opinion
  • Access, inseption, copy
  • Equality of Profits
  • Interest on capital
  • Interest on advance
  • To get indemnity
  • Partner’s authority
  • Power in an emergency
  • Reconstitution
  • Dissolution

Liability of Parties

Negotiable Instrument refers to a promissory note, bill of exchange or cheque payable either to order or to bearer.  It is a piece of paper which carries some value and is transferable from one person to another by mere delivery or by endorsement and delivery. Here, we will discuss the liability of parties to negotiable instrument act.

The provisions relating to the liability of parties to negotiable instruments are under section 30 to 32 and 35 to 42 of the Negotiable Instrument Act, 1881.

The Liability of parties is as follows:

  1. Liability of Drawer (Section 30)

Drawer means a person who signs a cheque or a bill of exchange ordering his or her bank to pay the amount to the payee.

In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the drawer of such cheque or bill of exchange needs to compensate the holder such amount. But, the drawer needs to receive due notice of dishonour.

So, the nature of the drawer’s liability on drawing a bill is:

  • On due presentation:- It should be accepted and paid accordingly.
  • In the case of dishonour:- Drawer needs to compensate the holder such amount, only when he receives a notice of dishonour by the drawee.
  1. Liability of the Drawee of Cheque (Section 31)

 The person who draws a cheque i.e drawer having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, or in default of such payment, he shall compensate the drawer for any loss or damage caused by such default.

The drawee of a cheque will always be a banker. As a cheque is a bill of exchange, drawn on a specified banker by the drawer, the banker is bound to pay the cheque of the drawer, i.e., the customer. For the following conditions are need to be satisfied:

  • Sufficient amount of funds to the credit of customer’s account should be there with the banker.
  • Such funds are required to be properly applied against the payment of such cheque, e.g., the funds are not under any kind of lien etc.
  • The cheque is duly required to be paid, during banking hours and on or after the date on which it is made payable.

If the banker unjustifiably refuses to honour the cheque of its customer, it shall be liable for damages.

  1. Liability of Acceptor of Bill and Maker of Note (Section 32)

 As per section 32 of negotiable instrument act, in the absence of a contract to the contrary, the maker of a promissory note and the acceptor before the maturity of a bill of exchange are under the liability to pay the amount thereof at maturity.

They need to pay the amount according to the apparent tenor of the note or acceptance respectively.  The acceptor of a bill of exchange at or after maturity is liable to pay the amount thereof to the holder on demand.

The liability of the acceptor of a bill or the maker of a note is absolute and unconditional but is subject to a contract to the contrary and may be excluded or modified by a collateral agreement.

  1. Liability of Endorser (Section 35)

 An endorser is the one who endorses and delivers a negotiable instrument before maturity. Every endorser has a liability to the parties that are subsequent to him.

Also, he is bound thereby to every subsequent holder in case of dishonour of the instrument by the drawee, acceptor or maker, to compensate such holder of any loss or damage caused to him by such dishonour. However, he is to compensate only after the fulfilment of the following conditions:

  • There is no contract to the contrary
  • The Endorser has not expressly excluded, limited or made conditional his own liability
  • And, such endorser shall receive due notice of dishonour
  1. Liability of Prior Parties (Section 36)

 Until the instrument is duly satisfied, every prior party to a negotiable instrument has a liability towards the holder in due course. The prior parties include the maker or drawer, the acceptor and all the intervening endorsers. Also, there liability to a holder in due course is joint and several. In the case of dishonour, the holder in due course may declare any or all prior parties liable for the amount.

  1. Liability Inter-se

 Every liable party has a different footing or stand with respect to the nature of liability of each one of them.

  1. Liability of Acceptor when Endorsement is Forged (Section 41)

 An acceptor of a bill of exchange who had already endorsed the bill is not relieved from liability even if such endorsement is forged. This is so even if he knew or had reason to believe that the endorsement was forged when he accepted the bill.

  1. Acceptor’s Liability when Bill is drawn in a Fictitious Name

An acceptor of a bill of exchange who draws a bill in a fictitious name, payable to the drawer’s order will be liable to pay any holder in due course. He or she will not be relieved from such liability by reason that such name is fictitious.

Bill Discounting and Purchasing

Bill discounting

Bill Discounting is a method of trading the bill of exchange to the financial institution before it gets matured, at a price that is in a smaller amount than its par value. The discount on the bill of exchange will be based on the remaining time for its maturity and also the risk concerned in it.

Bill discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then conferred to the seller’s client and the full amount is collected. Bill discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through a letter of credit. It is an arrangement whereby the seller recovers an amount of sales invoice from the financial intermediaries before it’s due. It is a business vertical for all kinds of financial intermediaries such as banks, financial institutions etc.

Bill discounting is a major trade activity. It aids the seller’s get funds earlier upon a small fee or discount. It also helps the bank earn some revenue. When the due date of the credit period comes, the borrower or (seller’s) customer can pay money then.

Bill discounting refers to a method of working capital finance for the seller of goods. It refers to a fee charged by the bank from the seller of the goods to release funds before the end of the credit period. The bill is presented to the customer and the amount is collected by the bank. It is mostly applicable in cases where letter of credit is used as a mode of payment. Bill discounting is also commonly known as invoice discounting or the purchase of bills. It is a major trading activity wherein the seller of the goods gets funds before the term of the letter of credit expires for a small amount charged by the bank as fees.

The fee paid by the seller to the bank or the financial intermediary usually depends upon the time left before maturity of letter of credit for which the bill is discounted and the risk perceived. It also depends a great deal over the credit worthiness of the seller and the past payment history of the buyer of goods.

Bill Discounting Companies in India

Bill discounting provides, as a present-day alternative to traditional working capital requirements, immediate access to funds can be provided to entrepreneurs by using their unpaid bills or goods received notes (GRN) as collateral. At present, many banks and non-banking financial companies (NBFCs) provide bill /GRN discounting services to business owners. Hence, an entrepreneur has the option to choose from a wide range of bill discounting service providers. But choosing a good provider is the key to go hassle free and save costs.

Myforexeye an online bill discounting platform where business owners get an opportunity to raise funds for their working capital needs at attractive terms by selling their unpaid invoices raised. Myforexeye aims to remove operational inefficiencies around the invoice discounting space by extensively using technology and reduction in interest rate costs.

Bill Discounting Process

The Process of Bill Discounting is as Follows;

  • The seller ships the goods on credit to the buyer and sends the invoice to them
  • The buyer accepts the invoice and acknowledges payment is due after credit period over.
  • The seller approaches the bank to discount the bill.
  • The bank transfers the fund to the seller after deducting discount fee as per the norms.
  • When the payment is due, the bank or the seller collects the money from the buyer.
  • The bank wants the following conditions to be fulfilled to discount the bill:.
  • The bank will look into the seller’s reputation and previous payment history of the buyer.
  • The buyer should have a reputed bank. This will ensure seller bank that buyer is reliable.
  • The bill should be a usance bill.

Bill Purchasing

The terms ‘bills purchase’,’ bills discount’ and ‘bills negotiation’ are respectively used by the bank for financing against ‘Demand Bills’,’Usance Bills’ and LC bills. The seller of goods (exporter) gets immediate money from the bank for the goods sold by him irrespective of whether it is a purchase, discount or negotiation by the bank according to nature of bills.

For an importer, original shipping documents are required for the purpose of taking delivery of goods shipped to him by the exporter. To enable the importer to take delivery of the cargo shipped to him, the exporter after shipment of goods prepares necessary set of documents like commercial invoice, packing list, certificate of origin, quality certificate, Bill of lading/Airway bills, dock warrant, dock receipt, warehouse receipt, etc. along with order for the delivery of title to goods. The set of documents so prepared will be submitted by the exporter to his bank for onward transmission of documents to the importer’s destination, with an instruction to collect the invoice amount of goods dispatched by him under contracted terms.

Facility of Bill Purchasing

  • If this Sale is a Credit Sales, then the seller will get the money from the purchaser only after the expiry of credit period.
  • If the seller does not have extra money, during the period between credit sales and realization of money from debtor, he will not be able to buy more goods and sell again at a profit.
  • To facilitate the business of manufacture, trade etc, banks help you by giving financial resources in the form of Bill Discounting Facility and the bank’s bill finance product helps you bridge the fund gap between the date of sale of products to the receipt of payments.
  • The bank purchases the bill of exchange your company receives against a product sale, at a discount, thus doing away with the delay in realizing the receivables.
  • The extent of discounting would amount to the interest calculated till the payments for the original sale are realized, and will be determined on the basis of market interest rates as well as the credit rating of the borrower.
  • So, don’t keep the funds blocked during the credit period but get them discounted and increase your sales turnover.

Ancillary Services of the Bankers

Ancillary services are other services that banks offer to common men along with the necessary banking services. These ancillary services form a very minuscule of the services offered by the banks. Some of the ancillary services provided by the banks are:

  1. Funds transfer service

Useful for sending and receiving money from all over the world.

  1. Forex service

You can buy the foreign exchange for any purpose of expenditures like travel, buying merchandise, etc. and sell the same to the bank when you earn or receive from abroad.

  1. Custodial Service

You can keep your valuables like jewels, documents, etc. Under this service, this is commonly known as Locker facility (Safe Deposit Vaults).

  1. Gold sale

Only a few selected branches of banks or banks are allowed to provide this.

  1. e–Banking

Also known as Net banking or Internet banking is  the latest and most convenient facility of the banks .You can get id and password to operate your account online : for transfer of funds to another account in the same bank or another bank. You can keep the surplus funds in fixed deposit by using this facility.

Remittance of funds

Some default funds transfer limits are given to customers based on the type of account. In case you wish to raise the limits per day), you may give a written request to your branch.

  1. Beneficiary Maintenance

You can maintain a “Beneficiary” for whom you normally wish to transfer funds.   You have to give a “Payee ID” for each of the beneficiary and should attach a valid Account for each of the beneficiary maintained by you.

  1. Funds Transfer between your Accounts (Real-time)

You can transfer funds to the extent of “Net available balance” (from one of your accounts – viz. Source Account) or up to the ‘Per day limit’ fixed by the Bank for you, whichever is less, to any one of your other accounts. 

  1. Third Party Funds Transfer (Real-time)

You can transfer funds to the extent of “Net available balance” (from one of your accounts viz. Source account) or up to the “Per day limit” fixed by the Bank for you, whichever is less, to any one of the Beneficiary Accounts maintained by you. All the Beneficiary Accounts maintained by you will be available in the pick list and you can select any one of the accounts.

  1. NEFT online Transfer

You can transfer funds to the extent of “Net available balance” (from one of your accounts viz. Source account) or upto the “Per day limit” fixed by the Bank for you, whichever is less, to an account with another Bank. The funds will be transferred using the NEFT facility provided by RBI and will be processed in the next available settlement cycle depending on the time of request. The beneficiary gets the credit on the same day or the next day depending on the time of settlement.

Term Deposit Options

Term Deposit Details: You can view the details of the selected Term Deposit account such as principal, contracted interest rate, maturity value, tenure, maturity date, lien (if any) etc.   

Loan Options

  • Loan Account Details: You can view the details of the loan account selected and print these details using “print” option. You can also go to “Account Summary”, ‘Early and Final Settlement” and “Loan Repayment” options from here.
  • Loan Account Activity: You can view the details of transactions for the selected account for any specified period. The details of transactions can be directly printed using ‘print’ option or can be downloaded and saved as a file using “download” option.

Standing Instruction (SI) Options

  • Initiate Standing Instructions: You can create a Standing Instruction. The Standing Instructions are of 3 types viz., Account to Account, Credit to Loan Account and Banker’s Cheque (BC) Request. Wherever the BC request is selected, you have to fill up beneficiary details also. The Bank will prepare the BC and mail it to you.   For all the 3 types, the Standing Instructions will be executed on the Day Begin of the execution day. In case of insufficient balance, no further trials will be made till the next execution date.
  • View SI: You can view the details of the Standing Instructions you had given either directly at the branch or through Internet Banking.

(For removing Standing instructions, you have to give a request through your branch.)

Safe custody and safe deposit                          

The facility of Safe Deposit Lockers is an ancillary service offered by the Bank. The Bank’s branches offering this facility will indicate/display this information.

Secrecy and Confidentiality

The Bank will ensure utmost secrecy of the Safe Deposit Lockers hired by the customer and will not divulge any information about hiring of lockers, mode of operation etc. to anyone, except when the disclosure is required to be made with the clear consent of the hirer(s) or in compliance of the orders of a competent authority having statutory powers.

Bank’s lockers will be available to any person, having contractual capacity i.e. capacity to enter into a contract. Thus locker can be hired by an individual singly and / or two or more individuals jointly as well as firms, limited Companies, Societies, Associations, Clubs etc.

Allotment of locker

Allotment of lockers shall be based on the duly (properly) filled in application of the prospective hirers on the printed format provided by the bank. Lockers will be allotted by the branches on first come first served basis.

Providing a copy of the agreement

Branches will give a copy of the agreement to the locker-hirer at the time of allotment of the locker, if preferred by the customer.

Recovery of rent from hirer(s)

Safe Deposit Locker  rent  will be payable in advance and in the event of locker rent remaining  unpaid, when due, the Bank will have the right to refuse access to the locker hirer(s). Locker rent will be recovered on annual basis. The lease period of one year will start from the date of hiring the locker and will continue till the preceding day of the corresponding date in the subsequent year.

Operations of Safe Deposit Vaults/Lockers

Branches will exercise due care and necessary precaution for the protection of the lockers provided to the customer. The Hirer/s can operate the Safe Deposit Locker only on the Bank’s working days and during the business hours of the Bank.

Before operating the locker, the hirer/s should sign the attendance register which shall be kept at the bank.

Death of the hirer

  • Notice of knowledge of the death of a hirer or a surviving hirer will be recorded in the Locker Register with date and source of information under the initials of an officer.
  • As a further precaution, a slip reading ‘hirer deceased’ will be pasted on the locker.
  • Thereafter access to the locker should be allowed on production of legal representation.
  • Where authority has been given to the survivor or survivors to operate the locker in writing specifically at the time of lease of the locker, in the case of joint account, the question of legal representation does not arise unless the survivor also dies.

Surrender of Locker:

  • Locker can be surrendered by the hirer/s at any time during the contract period through a written application and handing over of keys to the Bank Officials.
  • Bank can also request for surrender of locker with due notice.

The major aspects governing the locker services are:

  • The Bank will hire locker only to properly introduced persons.
  • Lockers are rented out for a minimum period of one year. Annual rent is payable in advance.
  • Loss of key should be immediately informed to the branch.
  • Withstanding instruction, the rent may be paid from the deposit account of the hirer.

Employment of Funds by Commercial Banks Financial Statement Analysis

The reported financial statements for banks are somewhat different from most companies that investors analyze. For example, there are no accounts receivables or inventory to gauge whether sales are rising or falling. On top of that, there are several unique characteristics of bank financial statements that include how the balance sheet and income statement are laid out. However, once investors have a solid understanding of how banks earn revenue and how to analyze what’s driving that revenue, bank financial statements are relatively easy to grasp.

How Banks Make Money?

Banks take in deposits from consumers and businesses and pay interest on some of the accounts. In turn, banks take the deposits and either invest those funds in securities or lend to companies and consumers. Since banks receive interest on their loans, their profits are derived from the spread between the rate they pay for the deposits and the rate they earn or receive from borrowers. Banks also earn interest income from investing their cash in short-term securities like rbi.

However, banks also earn revenue from fee income that they charge for their products and services that include wealth management advice, checking account fees, overdraft fees, ATM fees, interest and fees on credit cards. 

The primary business of a bank is managing the spread between deposits that it pays consumers and the rate it receives from their loans. In other words, when the interest that a bank earns from loans is greater than the interest it pays on deposits, it generates income from the interest rate spread. The size of this spread is a major determinant of the profit generated by a bank. Although we won’t delve into how rates are determined in the market, several factors drive rates including monetary policy set by the Reserve Bank.

Types of Securities in Banks

Security is what the borrower puts up to guarantee payment of the loan. Moreover security means immovable & chattel or personal asset or assets to which a lender can have recourse if the borrower defaults in the loan payment. Bankers, whenever advancing loans, first ask for the security to be put for the loans requested. Different types of securities are used depending upon the nature of the advances issued by the banks. A good security must be enough to cover the risk, highly liquid, free from any encumbrance, clean in ownership and easy to handle.

There are two types of banks security.

  • Personal Security
  • Non-personal security

  1. Personal security

If any banks client himself or third party is considered as security is called personal security. without receiving the immovable & chattel assets as security, if bank can receive any client himself or any person own self on be half of that client as security is considered as personal security. Bank will consider the person or third party only for then when he has enough social dignity and goodwill or a scope of applying law against himself in future or he is engaged in renowned business, government or recognized non government organization.

  1. Non-personal security

without receiving any client himself or any person own self on be half of that client as security , if bank can receive the immovable & chattel assets as security is considered as non-personal security. There are four types of non-personal security. such as-

  • Lien
  • Pledge
  • Mortgage
  • Hypothecation

The above four categories of non-personal security are given below with detail.

(a) Lien

The right of retain foods is known as lien. The lawful right of a lender to offer the guarantee property of an account holder who neglects to meet the commitments of an advance contract. A lien exists, for instance, when an individual takes out a vehicles advance. The lien holder is the bank that allows the advance, and the lien is discharged when the credit is forked over the required funds. Another kind of lien is a repairman’s lien, which can be appended to genuine property if the property proprietor neglects to pay a foreman for administrations rendered. In the event that the account holder never pays, the property can be sold to pay the lien holder. There are two types of lien:-

  • General lien: Here, Bank has the possess of the assets have been kept as security and bank can’t transfer the possession to another until the loan amount is being paid.
  • Special lien: Here, Bank has the possess of the assets have been kept as security and bank can transfer the possession to another on conditions is called special lien.

(b) Pledge

Here the possess of assets is to bank or loan provider, but the ownership is to borrower. After payment, bank transfers the possession of security assets to borrower. When a customer takes loan against jewels he pledges the jewel to the bank.  Similarly a customer availing loan on key cash credit basis pledges the  goods to the banker by keeping them in a godown under lock and key  control of the bank. Pledged goods are to be insured and the pledgee (banker) has to take reasonable care to protect the property pledged.

3. Mortgage

It is an interest in property created as security for a loan or payment of debt and terminated on payment of the loan or debt. A mortgage is a contract that permits a loan provider partially or fully to foreclose that security when a borrower is unable to pay the loan amount. Mortgage is applicable only for immovable assets and this is why it is called immovable property mortgage. There are many types of mortgage have been described below.

  • Simple mortgage: If the loan amount isn’t paid by borrower and legal step is taken against him or lender can purchase which security assets on the opinion of borrower is called simple mortgage.
  • Fixed mortgage: The borrower gives which property in black & white or in registering to the lender and if the loan is not paid in time, then legal possession of that security is gained by lender is called fixed mortgage.
  • Conditional mortgage: If the loan amount isn’t paid in time and without fulfilling the determined conditions, the which security is not sold or transfered is called conditional mortgage.
  • Floating mortgage: The possession right of which mortgage properly is belonged to borrower and only documents are submitted to loan provider is called floating mortgage.
  • Equitable mortgage: The documents of which mortgage property is kept to bank for a specific time period and possession is belonged to borrower and after exceeding the payment period bank try to gain the legal possession is called equitable mortgage.
  • Registered equitable mortgage: The ownership documents of which mortgage property is kept to lone provider with registration for a specific time period and possession is belonged to borrower is called registered equitable mortgage.
  • Use fructuary mortgage: The possession & consumption of which mortgage property is given to loan provider as loan providing till a specific time period and after exceeding that time period the belongingness of that property is leaved to borrower is called use fructuary mortgage.
  • English mortgage: The ownership of which mortgage property is to loan provider and possession or belongingness of that property is to borrower is called English mortgage. If borrower is fail to pay the loan amount then the possession power is automatically gone to loan provider.
  1. Hypothecation

It is pledge to secure an obligation without delivery of title or possession.

At last we can say that, at the modern banking sectors a great changes has been occurred in the categories of categories of mortgage.

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