Q-1

What are the basic characteristics of Credit?

1. it is a bipartite contract
2. the contract is personal in nature
3. the contract has a pecuniary nature
4. there is the presence of trust and confidence
5. credit is risk
6. futurity
7. creation of legal obligation
8. the transfer of ownership or title

Q-2

What is 'Economies Of Scale'

Economies of scale is the cost advantage that arises with increased output of a
product. Economies of scale arise because of the inverse relationship between the quantity
produced and per-unit fixed costs;

i.e. the greater the quantity of a good produced, the lower the per-unit cost because these costs
are spread out over a larger number of goods.

Optimum firm
is that firm which fully utilizes its scale of operation and produces optimum output with the
minimum cost per unit production.

In the short-run, a firm would build the scale of plant and operate it at a point where the
average cost is at its minimum. This is regarded as the optimum level of production for the
firm concerned, if the demand for the product increases from this least cost output; it cannot
change the amount of land, buildings, machinery and other input in short period of time. It has to
move along the same scale or type of plant. The average total cost, therefore, begins to rise due
to the diseconomies of the scale.

What does 'Diseconomies Of Scale' mean

Diseconomies of scale is an economic concept referring to a situation in which economies of

scale no longer functions for a firm. With this principle, rather than experiencing continued
decreasing costs and increasing output, a firm sees an increase in marginal costs when output is
increased. Diseconomies of scale can occur for various of reasons, but the root cause usually
comes from the difficulty of managing an increasingly large workforce.
BREAKING DOWN 'Diseconomies Of Scale'

Diseconomies of scale specifically come about due to three reasons. The first is a situation of
overcrowding, where employees and machines get in each other's way, lowering operational
efficiencies. The second situation arises when there is a greater level of operational waste, due to
a lack of proper coordination. The third and final reason for diseconomies of scale happens when
there is a mismatch between the optimum level of outputs between different operations.
Essentially, diseconomies of scale is the result of the growing pains of a company after it's
already realized the cost-reducing benefits of economies of scale.

Examples of Diseconomies of Scale

An overcrowding effect within an organization is often the leading cause of diseconomies of

scale. This happens when a company grows too quickly, thinking that it can achieve economies
of scale in perpetuity. If, for example, a company is able to reduce the per unit cost of its product
each time it adds a machine to its warehouse, it might think that maxing out the number of
machines is a great way to reduce costs. However, if it takes one person to operate a machine,
and 50 machines are added to the warehouse, there is a good chance that these 50 additional
employees will get in each other's way and make it harder to produce the same level of output
per hour. This increases costs and decreases output.

Q-5 what are the credit instrument? what are different type of credit instrument?
A document (as check, letter of credit, or bond) other than paper money that evidences a debt.

Different type of credit instrument

Cheque: A cheque is defined by Section 6 of the Negotiable Instrument Act as a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on demand.

2. Bills of Exchange: A bill of exchange has been defined under section 5 of the Negotiable Instrument
Act as an instrument in writing containing an unconditional order, signed by the banker directing a
certain person to pay certain sum of money, only to or to the order of the certain person or to the
bearer of instrument.

3. Promissory Note: A promissory note is defined by Section 4 of the Negotiable Instrument Act as an
instrument in writing (not being a bank note or currency note) containing an unconditional undertaking
signed by the maker to pay a certain person or to the bearer of the instrument.

4. Drafts: These are bills of exchange issued by a banker on his branch office. Same rules are applicable
as are applicable to the cheques.

5. Hundies: These are bills of exchange in Vernacular Language, which have been in common use in our
country for purpose of business from at least the 10th century A.D and which have been recognised by
law as valid and effective negotiable instrument.

6. Letters of Credit: IT is a letter written by one person or bank to another requesting the latter to pay
any amount of money up to certain limit to the person named in the letter or in whose favour the letter
is written.

7. Circular Letters of Credit: This letter is different from the letter of credit for it is addressed to several
branches of the issuing banker.

8. Travellers Cheque: Such cheques are very useful to tourists or travellers, for against delivery of these,
holders can obtain funds from any branch. Every cheque is of a fixed amount already printed on it.

9. Treasury Bills: In sub-continent, for the first time, these bills were issued by the Government on 5
November 1790 to raise money for war purposes and are issued even now.

10. Book Credit: Book credit are effected when a tradesman sells on credit or a bank advances money,
the sale or advance being entered into the account books for the tradesman or of the bankers.

Q-6

What is PROMISE TO PAY?

An agreement between two parties, the lender and the borrower, in which the lender promises to
pay a set amount of money on a set date. Usually made if the lender is behind in payments or
payment is overdue.

Q-7

What is a 'Promissory Note'

A promissory note is a financial instrument that contains a written promise by one party (the
note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on
demand or at a specified future date.
Q-8

"Cheque is an instrument in writing containing an unconditional order, addressed to a banker,

sign by the person who has deposited money with the banker, requiring him to pay on demand a

certain sum of money only to or to the order of certain person or to the bearer of instrument."

Instrument in writing : A cheque must be necessarily in writing. Oral orders to the bank to pay

some money do not constitute a cheque.

Contains an Unconditional Order : A cheque is an order to a particular bank to pay a particular

sum of money. It should not contain any words of request like please or kindly.

Drawn on a Specified Banker : A cheque is always drawn on a particular banker only.

Generally the full name and address of the bank is printed on the cheque.

Payee to be certain : To be a valid cheque, it must be payable to a certain specified person or to

his agent or the bearer there off.

Order to Pay a Certain sum of Money A cheque is usually drawn for a definite sum of

money. Indefiniteness has no place in monetary transactions.

Payable on Demand only : A cheque is always payable only on demand. It is not necessary to

use the word on demand as in the case of demand bill.

Signed by the Drawer : To be valid, a cheque should be signed by a customer who draws it.

The drawer normally puts his signature at the bottom right hand corner of the cheque.

Q-9

Letter of Credit

A commercial letter of credit is a contractual agreement between a bank, known as the issuing
bank, on behalf of one of its customers, authorizing another bank, known as the advising or
confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its
customer, opens the letter of credit.

Letter of Credit Characteristics

Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the
beneficiary, but also any bank nominated by the beneficiary.

Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be
revoked or modified for any reason, at any time by the issuing bank without notification.

Transfer and Assignment

The beneficiary has the right to transfer or assign the right to draw, under a credit only when the
credit states that it is transferable or assignable. Credits governed by the Uniform Commercial
Code (Domestic) maybe transferred an unlimited number of times.

Sight and Time Drafts

All letters of credit require the beneficiary to present a draft and specified documents in order to
receive payment. A draft is a written order by which the party creating it, orders another party to
pay money to a third party. A draft is also called a bill of exchange.

Standby Letter of Credit

The standby letter of credit serves a different function than the commercial letter of credit. The
commercial letter of credit is the primary payment mechanism for a transaction.

Procedures for Using the Tool

The following procedures include a flow of events that follow the decision to use a Commercial
Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous.

Mechanism of letter of credit.

Q-10 What is bank draft? Is a bank draft credit instrument? Why?

What is a 'Bank Draft'

A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. A draft
ensures the payee a secure form of payment.
DRAFT-Is also an order to pay and is a bill of exchange drafts are classified as sight or demand,
time, commercial, or bank draft. Negotiability of credit instrument.

Q-11 What is Bond? What is the basic difference between a bond & a note?

A bond is a debt investment in which an investor loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined period of time at a variable or fixed interest
rate.

difference between a bond & a note---

For accounting purposes, a note payable and a bond payable are similar. That is, both are 1)
written promises to pay interest and to repay the principal amount or maturity amount on
specified future dates, 2) both are reported as liabilities, and 3) interest is accrued as a current
liability.

If the bond or the note has its principal or maturity due within one year of the balance sheet date
and the payment will cause a reduction in working capital, the bond or note will be reported as a
current liability. If the bond or note will not be due within one year of the balance sheet date or if
the maturity date is within one year but will not cause a reduction in working capital when it
becomes due, it will be reported as a long-term liability. (For example, there may be a bond
sinking fund or a formal agreement for refinancing the debt with new long-term debt or stock.)

Outside of accounting, I am certain there are differences. For example, debt with an original
maturity date of less than a year is likely to be a note. However, some notes can be longer than
one year. Government debt securities might be bills, notes, or bonds depending on the original
maturity date of the debt security. Perhaps some notes do not specify interest.

Q-12 M1, M2, M3?

Different measures of money supply. Not all of them are widely used and the exact
classifications depend on the country. M0 and M1, also called narrow money, normally include
coins and notes in circulation and other money equivalents that are easily convertible into cash.
M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3
includes M2 plus longer-term time deposits and money market funds with more than 24-hour
maturity. The exact definitions of the three measures depend on the country. M4 includes M3
plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the
local practice.

Q-13 What are the economic functions of credit?

Large Scale Production :-

The less developing countries like India or Pakistan facing capital shortage problem. Our
production sources are limited. So credit instruments have provided the money to the
industrialists.
Increases In Saving Rate :-
Credit provides an opportunity to save the money some people save the money but they are not
capable to do any business.

Shifting Of Capital To Productive Purposes :-

There are so many people who have surplus money but they are not capable to do any business.
So they lend it to the financial institutions.

Economy In The Use Of Metal :-

Credit instruments are used in place of metallic coins. So there is a saving of precious metals
also. Further use of credit instruments is more effective and convenient.

Provision Of Working Capital :-

Some times an industrialist faces the finance problem to purchase the raw material or for the
payment of wages. So he avails the credit facility.

Sale Of Bonds :-
Some time a firm can obtain credit by selling the bonds. If the firm prospects are bright it will
repay the principal amount with interest.

Case Of Young Firm :-

Credit enables the manager of a young firm to develop its resources at a rapid speed.

Emergency Of New Businessman :-

Credit makes possible the entrance of new talent in the business enterprise. If the person has all
the qualities of a good entrepreneur but having no capital, credit provides him the chance to
utilize his qualities.

Purchase Of Goods :-
Credit enables the consumer to purchase the consumption goods like T.V. Radio, Car House etc.

International Payments :-
Through the bills of exchange international payments can be made very easily. There is no need
to import or export the gold for the international business transactions.

Useful For The State :-

If the Govt. Budget is deficit, it can be met by selling the bonds and receiving the credit. Even in
case of emergency, war, credit is very beneficial for the state.

Q-17 Businessmen as users of credit?

Being an "authorized user" basically means you have someone else's card in your name.
You can make purchases with it, but you're not the primary owner of the card. And you're
right: signing on as an authorized user can help someone build or rebuild credit.

Q-18 Credit functions?

Besides having a goal, credit has the following functions.

- Enhances the usability of the money.

- Increasing the amount of money in circulation and traffic of money.

- Increasing the value or usability of the goods.

- Increasing the circulation or distribution of goods.

- As a means of supporting economic stability.

- Activate and enhance the usefulness or the existing economic potential.

- As one of the bridges increase the national income distribution.

- As one means to establish international relations.

Q-19 what is credit management?

Credit management

is the process of granting credit, the terms it's granted on and recovering this credit when it's
due. This is the function within a bank or company to control credit policies that will improve
revenues and reduce financial risks.