Lecture Retail and merchant banking – Lecture 22

After studying this chapter you will be able to understand: Evaluation of Loan proposals Which variables should be consider? Negotiable instrument, what are the two features of negotiable instruments?

Revise Lecture 22

- Evaluation of Loan proposals

Which variables should be consider?

Loans and Advances

Evaluation of Loan proposals

* While evaluating the proposal, bank

Should assess not only the ability of the client to pay back the loan but also his willingness to repay

‘ They need to consider the following

variables while evaluating a loan

proposals;

Loans and Advances

Evaluation of Loan proposals Industry level credit analysis:

- It needs to be performed to study the

prospects of the industry and It most

Importantly includes a study of the

1 Industry cycle

» Threat from substitutes

3 Shifts in consumer demands

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Loans and Advances

Evaluation of Loan

proposals

Operational Efficiency:

- The company level credit rating is

conducted to assess the operational

efficiency of the client company The

critical aspects that are to be evaluated In this process fall into the following

categories;

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Loans and Advances

Evaluation of Loan proposals Financial Efficiency:

1

2

- Repayment of the loan by the clients

depends greatly on their financial

soundness Hence financial analysis

becomes an imperative part of credit risk analyst It includes an analyses of;

Financial leverage

Cost of capital

Loans and Advances

Evaluation of Loan proposals Management Evaluation:

- The management evaluation throws light

on the willingness of the client to repay

- It Includes a study on the performance of the promoter, top management and also the performance of group companies

under the same management

‘ Negotiable

Instrument

Negotiable Instrument

* The term ‘negotiable instrument’ consists

of two parts, viz, ‘negotiable’ and

‘Instrument’

- The word ‘negotiable’ means ‘transferable

by delivery’ and the word ‘instrument’

means ‘written documents by which a right

Is created in favour of Some person’

Negotiable Instrument

- It means an instrument possessing the

quality of negotiability is entitled to be

called a negotiable instrument

- In other words, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times

before the final payment Is made

- What are the two features of negotiable instruments?

Negotiable Instrument

* Anegotiable instrument must possess two features;

1 The right of ownership contained in the

Instrument can be transferred from one

person to another by mere delivery if It Is

payable to bearer, or by endorsement and delivery if payable to order

Negotiable Instrument

2 The transferee taking the Instrument in

good faith and for consideration gets a good title to the same even though the title of the transfer Is defective

- What the essential characteristics ofa

negotiable instruments?

Negotiable Instrument

- The essential characteristics of a

negotiable instruments are;

1 Payable to order or bearer:

- It must be payable either to order or

bearer

2 Freely transferable:

- An instrument payable to order Is

negotiable by endorsement and delivery and an instrument payable to bearer Is

Negotiable Instrument

3 Presumption as to holder:

- Every holder of negotiable instrument Is

oresumed to be holder in due course

4 Title of holder in due course:

* A holder in due course i.e the person who becomes the possessor of negotiable

Instrument before maturity, for valuable

consideration and in good faith, gets the Instrument free from all defects in the title

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Negotiable Instrument

5 Presumption as to considerations:

- Every negotiable instrument is presumed

to have been made, drawn, accepted,

endorsed, negotiated or transferred for considerations

* What are the main negotiable

instruments are?

Negotiable Instrument

Promissory notes

* According to the definition;

- Adocument of promise In writing by a

person to pay a certain sum of money

unconditionally to a certain person or

according to his order is called promissory

note.

Negotiable Instrument

- The characteristic features of a promissory note are;

Apromissory note must be In writing,

duly signed by its maker and properly

Stamped as per the Pakistan stamp Act

2, It must contain an undertaking or promise

to pay

3, The promise to pay must not be

conditional

7 The sum payable mentioned must be

certain or capable of being made certain It

Negotiable Instrument

- In course of transfer of a promissory note

by payee and others, the parties involved may be the;

- The endorser: the person who endorses the note in favour of another person

- The endorsee: the person in whose favour the note Is negotaited by endorsement

Lecture 23

Bill of Exchange

Bill of Exchange

- According to the negotiable instrument

Act, 1881,a bill of exchange Is defined as

an instrument in writing 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

It is an order to make payment

The order to make payment Is

unconditional

The maker of the bill of exchange must

Bill of Exchange

5 The payment to be made must be certain

6 The date on which payment is made must also be certain

7 The bill of exchange must be payable toa certain person

8 The amount mentioned ts payable either

on demand or on the expiry of a fixed period

of time

Bill of Exchange

9 The bill of exchange must be stamped as per the requirement of law

Bill of Exchange

‘ According to the Act, a bill of exchange Is generally drawn by the creditor on his

debtor

- It has to be accepted by the debtor or

someone else on his behalf It is called a DRAFT before its acceptance

- Therefore, one of the underlying features

of a bill of exchange Is that it has to be

accepted either by the person upon whom itis drawn or by someone else on his/her

Bill of Exchange

Parties to a Bill of

Exchange

Bill of Exchange

Parties to a Bill of Exchange

- There are three parties to a bill of

exchange;

The drawer ts the maker of the Dill of

exchange

2 The drawee Is the person upon whom the

bill of exchange Is drawn

3, The payee Is the person to whom the

payment Is made

Bill of Exchange

Parties to a Bill of Exchange

‘ The drawer of the bill himself will be the payee If he keeps the bill with him till the date of its payment

- The payee may change In the following

Situations;

- In case the drawer has got the bill

discounted, the person who has

discounted the bill will become the payee

Bill of Exchange

Parties to a Bill of Exchange

- In case the bill is transferred in favour of a creditor of the drawer, the creditor will

become the payee

* Normally the drawer and the payee are the Same person Similarly, the drawee and

the acceptor are normally the same

person.

Bill of Exchange

CHEQUES

Cheques

- Acheque Is a negotiable instrument

Instructing a financial institution to pay a

Specific amount of a specific currency from

a specific demand account held In the

maker /depositor’s name with that

Institution

Actually a cheque Is an order by the

account holder of the bank directing his

banker to pay on demand, the specified

Cheques

- The cheque had Its orgigins in the ancient banking system in which bankers would issue orders at the request of their

customers to pay money to identified

payees

- Such an order was referred to as a Dill of

exchange

Cheques

- The use of bills of exchange facilitated

trade by eliminating the need for

merchants to carry large quantities of

currency to purchase goods and services

Cheques

6 Signature of the drawer

7 Routing / account number

8 Fractional routing number

A cheque Is generally valid indefinitely or for six months after the date of issue unless

otherwise indicated, this varies depending

on where the cheque Is drawn

Cheques

‘Features ofa

Cheque

Cheques

Features of a Cheque

* Some important features of a cheque are given below;

1 ACheque must be In writing and duly

Signed by the drawer

2 It contains an unconditional order

3, Itis Issued on a specified banker only

Cheques

Features of a Cheque

4 The amount specified is to be always

certain and must be clearly mentioned both

In figures and words

5 The payee Is always certain

6 It is always payable on demand

/7.The cheque must bear a date, otherwise it

Is Invalid and shall not be honoured by the bank

- The drawer drafts or draw a cheque, which

is also called cutting cheque, especially in the United States

Cheques

Features of a Cheque

- Ultimately, there Is also at least one

endorsee which would typically be the financial institution servicing the payee’s

account.

‘ Types of Cheques

Types of cheques

- Acheque used to pay wages due Is

referref to as a payroll cheque

- Atraveller’s cheque Is designed to allow

the person signing It to make an

unconditional payment to someone else

as a result of paying the account holder for that privilege These cheques can usually

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Features of a Cheque

- Acheque issued by a bank on Its own

account for a customer for payment toa

third party is called a Cashier’s cheque A Treasure’s cheque, a Bank cheque, ora

Bank draft

- Acheque issued by a bank, but drawn on

an account with another bank, Is a teller’s

cheque In addition banks often sell money orders