Know the types of credit instruments

A credit instrument is a written document that serves as evidence of a debt, such as a bill of exchange promissory note, bond, loan, cheque, or invoice.

A Bill of exchange is a written, unconditional order by one party (the drawer) to another party (the drawee) to pay a specified sum of money to a third party (the payee) at a predetermined date or on demand. The bill of exchange serves as a promise to pay and acts as a credit instrument, providing security and trust in transactions.

There are many types of bills of exchange, including:

Sight bill: A sight bill, also known as a sight draft, is a bill of exchange that must be paid immediately or within a set date upon presentation. In the bill of exchange, the exporter/Seller holds the title to the transported goods until the importer/buyer receives and pays for them.

Time bill of exchange: Payable on a set date, not on demand

Usance bill of exchange: Payable after a set period, usually several months

Time bill: A bill that is payable on a set date in the future.

Usance bill: A bill that is payable after a set period, usually several months. In the case of usance bills, credit can be granted for a maximum duration of 365 days from the date of shipment inclusive of the Normal Transit Period (NTP) and grace period, if any.  However, banks should closely monitor the need for extending post-shipment credit up to the permissible period of 365 days and they should persuade the exporters to realise the export proceeds within a shorter period. (Source: RBI Master Circular).

‘Normal transit period’ means the average period normally involved from the date of negotiation/purchase/discount till the receipt of bill proceeds in the Nostro account of the bank concerned, as prescribed by FEDAI from time to time. It is not to be confused with the time taken for the arrival of goods at an overseas destination.

Trade acceptance bill: When a draft is drawn on a Buyer/Drawee it’s considered a Demand for Payment. When “Accepted” by the Buyer/Drawee it becomes a Trade Acceptance. Most countries have common laws governing Trade Acceptance (typically covered by negotiable instrument law).

Accommodation bill: A bill created to facilitate financial assistance to a third party, such as a friend or family member without being backed by any trade transactions.

Documentary bill: A bill that is accompanied by supporting documents that verify the transaction between the buyer and seller.

Inland bill: A bill that is only due in the country to which it is issued.

Clean bill: A bill that has no attached documents, so it has a higher interest rate than other types of bills.

Bank draft: A bill of exchange issued by a bank, where the issuing bank guarantees payment.

Trade draft: A trade draft is a type of draft that is used in commercial transactions. Generally, when a company purchases goods from another company, it may use a trade draft to pay for the goods. The trade draft would instruct the company’s bank to pay the amount specified to the seller or the seller’s bank.

Promissory note: A bill of exchange where the drawer makes an unconditional promise to pay the payee a specified sum of money.

Cheque: A cheque is a type of bill of exchange that contains an unconditional order to the drawee to make a payment to the payee on behalf of the drawer. A bill of exchange is a financial instrument that can be used for payment, and a cheque is a specific type of bill of exchange that is drawn on a bank. The three parties involved in a cheque transaction are the drawer, the drawee, and the payee.

A bill of exchange is a legally binding document that requires one party to pay another party a fixed amount. It is often used in international trade to reduce the risk of non-payment.

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