The common forms of credit instruments are: 1. Cheque 2. Bill of Exchange 3. Draft 4. Letter of Credit 5. Hundi 6. Promissory Note.
Form # 1. Cheque:
A cheque is written order addressed to a banker, signed by the person who has deposited money with the banker to pay an amount of money specified on the order to a person named or to the bearer of the cheque. Sometimes the cheques are payable to self.
If a cheque does not satisfy the following conditions, then the bank may refuse to encash the cheque:
(i) It contains an unconditional order.
(ii) It bears a specific date.
(iii) The amount is payable on demand.
(iv) It is payable either to the order of the person named therein or to the bearer.
(v) It should mention the sum in words as well as in figures.
(vi) It should be signed by the customer as per his specimen signatures kept with the bank.
(vii) It is drawn on a bank.
Generally, following three types of cheques are in use:
(a) Bearer Cheque,
(b) Order Cheque, and
(c) Crossed Cheque.
(a) Bearer Cheque:
A bearer cheque is made payable to the bearer, i.e. to the person whosoever produces it at bank for encashment. It is like a currency note. If the bearer loses it, he can suffer a loss of his money, because the finder can take it to the bank and encash it. Therefore, bank is not responsible to recognise that the payment is made to the right person.
A bearer cheque does not require endorsement. An endorsement is the system of signing on the back of a cheque in order to transfer its ownership to another.
(b) Order Cheque:
A cheque, which is made payable to a certain person is known as an “Order Cheque”. For an order cheque, it is the responsibility of the bank to see that the payment is made to the right person. Therefore, for this purpose, an order cheque must have an endorsement. Thus in this type of cheque the possibility of its being stolen and encashed by a third person reduces to a large extent.
(c) Crossed Cheque:
When two parallel transverse lines are drawn across the face of the cheque on the left hand side from one end to the other with or without the words “A/C” or “& Co” etc., the cheque is said to be crossed cheque.
Where a cheque bears in addition the name of some person, it amounts to special crossing. These cheques can’t be encashed at the counter of the bank but can only be credited in the account of payee of his bank. This, therefore, eliminates the possibility of loss by theft and is extremely safe.
Form # 2. Bill of Exchange:
These bills are of two types:
(a) Foreign Bills, and
(b) Inland Bills.
When a buyer is not in a position to make to the payment in cash to the seller he can request the seller to draw on him a bill of exchange for a fixed period say generally for 90 days and agrees to pay the amount of the bill when it is sent to him on the date of its maturity. In this way the buyer gets the things on credit and arranges to pay the bill by selling the goods, before the bill becomes due for payment.
The seller can discount the bill immediately by producing it in a commercial bank and he has not to wait for cash till the date of maturity of the bill. The bank charges his normal rate of interest from buyer for that waiting period.
In this way, “Bill of Exchange” helps buyer and seller in a business financially.
Form # 3. Draft:
This is one of the cheapest means of transferring money from one place to another with the help of bank just as through Money Order with the help of Post Office, Foreign payments are also usually made through draft.
A draft is a form of cheque by one bank upon another bank or its own branch at a different place requesting it to pay the sum of money mentioned therein to the order of the person named or to the bearer on demand.
Like cheque, draft is also of three forms, i.e., bearer, order and crossed.
Form # 4. Letter of Credit:
This is also known as credit note and is generally used on foreign trade dealings. The exporter of the goods to be sure of his payment, requests the importer at the time of accepting his order to open a letter of credit in his (exporter’s) favour with the bank in the importing country.
A letter of credit is a sort of understanding given by a banker that bills drawn by the exporter according to the terms of the letter will be honoured by him. If importer agrees to open a letter of credit in favour of exporter, then he has to open an account with the banker depositing sufficient money or providing sufficient security.
Now the banker issues the letter of credit to the exporter authorising him to draw the bill of exchange on his branch or agent in the exporter’s country. Therefore, in this way exporter ships the goods, obtains necessary documents, prepares his invoice and draws his bill of exchange and produces all of them to the bank’s branch or agent in his own country and gets payment.
Form # 5. Hundi:
This is also a form of bill of exchange drawn in Indian languages. There are various kinds of Hundis. These were used in old time for the transmission of money but now-a- days these are obsolete.
Form # 6. Promissory Note:
This is also a credit instrument which is used to get credit or borrow money for short period. It must be presented by the holder to the maker on the due date and place.
A Promissory Note is an unconditional promise made by one person to another, and signed by the maker, promising to pay on demand or on a fixed date, a specific amount to or to the order of a person or its bearer.