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LOANS AND DISCOUNT

FUNCTION
TYPES OF LOANS
1. DEMAND LOANS
repayable at short notice

2. TERM LOANS
• granted for more than one year and repayment
of such loans is spread over a longer period.
• The repayment is generally made in suitable
instalments of fixed amount.
FUNCTIONS OF LOANS
• Purchasing Assets
o One of the primary functions of loans is to help
borrowers purchase assets.
o For individuals, this usually means buying a piece of
property or a car or a similar large purchase.
o Businesses, on the other hand, have a wide variety of
assets that they need, ranging from factory
equipment to expensive computer software and
hardware.
FUNCTIONS OF LOANS
• Investment
o made specifically for investment in stocks, bonds or other types of securities.

• Construction and Improvement


o It is more common for businesses like contracting firms to seek out
construction loans for large building projects.

o Improvement loans are designed to help owners make additions to their


property or repair large-scale damage.
FUNCTIONS OF LOANS
• Debt Management
o seeks to restructure an individual's loans so that the borrower can continue
making payments if they are having revenue problems.

o Debt consolidation loans, like refinances, help borrowers get their debt
under control.
Direct Loan
Discount Loan And Rediscount
GRANT LOANS Loan
Overdraft Line
a. Direct loan—A loan made available to a borrower directly from the issuing bank.
No third-party is used to any part of the loan. May result in lower interest rates
and fees.

b. Discount loan and rediscount loan—Discount loan is the interest and financing
charges are deducted from the face amount when the loan is issued. Rediscount
is the act of discounting a short-term negotiable debt instrument for a second
time.

c. Overdraft line—A line of credit that banks offer to their customers to cover their
overdrafts. Overdraft protection kicks in when a customer writes a check for
more than the amount in their account.
a. Secured loan
— It is a loan in which the borrower pledges
some asset as collateral for the loan.
LOANS
ACCORDING TO
b. Unsecured loan
SECURITY —It is obtained without the use of property as
collateral for the loan.

- Borrowers generally must have high credit


ratings to be approved.
THE EXCHANGE FUNCTION
Commercial bank covers domestic and
foreign exchange
LOCAL  Clearing and Collection of Checks,

EXCHANGE Drafts and other Items


 banks also clear and collect instruments

FOREIGN involved in the international network

EXCHANGE provide the means of payment for


international buyers and sellers
are prices and are , therefore, determined by
supply and demand for foreign exchange. The
date of payment is of utmost importance in
determining these rates. Hence, it becomes
EXCHANGE RATES evident that the method of transferring the
funds would be a matter of importance.
Payment transmitted by cable rather than by
mail would make a significant difference in the
rate of exchange.
ITEMS
EXCHANGED
- Cheques drawn on banks within the city are
the subject of interbank offsetting of
ON DOMESTIC balances.

LEVEL… - This system of settling balances is known as


the clearing process.

- When a depositor deposits his check instead of


encashing it, the check has to be cleared.
INTERNATIONAL drafts, letter of credit, banker's

FINANCE acceptance, as well as other items


destined for collection become the
subject of interbank settlements .
- an association on banks that agree to
contribute to the expenses of interbank
settlements of items for exchange or collection
to minimize efforts and provide safe measures

Clearing means it will be ascertained whether or


THE CLEARING HOUSE not the cheques or drafts have funds to back
them up.

The process of clearing checks begins from the


time the banks' representatives leave their
respective banks up to their return after having
exchanged the checks and the proper entries
are made in their books.
Co-equally owned by the members of the
Bankers Association of the Philippines. All
Philippine Clearing participants to the PCHC must be banking
House Corporation institutions that operate under a charter, or
certificate of authority granted by the Bangko
(PCHC) Sentral.
Built for the purpose of automating the
clearing system of checks and checking
transactions.
LETTERS OF
CREDIT
‘…the life-blood of international commerce…’
• Letter of credit transactions have been developed since the middle Ages in
connection with the trade of goods at the international level.

• The dynamism of the actual economy creates a need for financing that requires a
guarantee of payment at a time and for an amount that must be certain.

• As far as the payment issue is concerned, market reality, distance, geographical


barriers, uncertainty and lack of confidence among the business actors discourage
the global commercial venture.

• Fortunately, letter of credit or ‘documentary credit’ or ‘banker’s commercial credit’


has Brought a revolutionary solution to all this problems and has ensured sufficient
securities and certainty in payment transaction.
BANK VS. LETTERS OF CREDIT
• The involvement of the bank as a credit institution through the issuance of letters
of credit offers an opportunity to finance the import and export of goods.

• The broad credit transaction consists of three separate relationships:


a) the beneficiary (exporter/ seller) and the issuing bank
- Letter of Credit engagement

b) beneficiary and the applicant (importer/ buyer)


- Underlying contract
c) the buyer and the issuing bank
- Application agreement or Cover relationship
Legal Principles
Governing Letter Of
Credits
1. Principle of Autonomy
o one of the fundamental principles of letter of credit.
o The essence of this principle is that the Letter of Credit transaction
(transaction between seller and the issuing bank) is a separate and
independent transaction and it is, no way, connected with any other
transactions (for example, second and third transactions, as mentioned earlier
in introduction part). As a result of the autonomy principle, the banks do not
deal with the goods, services or performance regarding the underlying
contract.
2. The principle of Strict Compliance
The presented documents must be in accordance with the terms and
conditions of the letter of credit. Based on the contract between applicant
(importer) and issuing bank, the bank has the obligation to observe the
borders of the commission given to it and fulfils the request by observing the
principle of strict compliance. Issuing bank keeps the rejection right when it
meets the documents that disobey this principle.
TYPES OF LETTERS OF
CREDIT
1. Irrevocable and Revocable Letters of Credit
2. Confirmed and Unconfirmed Letters of Credit
3. The Standby Letters of Credit
4. The Revolving Letters of Credit
5. The Red Clause Letters of Credit
6. The Back-to-back Letters of Credit
7. The Transferrable Letters of Credit
Revocable Letter of
Credit Irrevocable Letter Of
Credit

o No form of security.
o can be canceled or amended at any
time prior to payment, at will and The issuing bank commits itself
without warning or notification. irrevocably to honor its obligation
o All the advantages are to the under the letter of credit upon full
benefit of the buyer, who disposes compliance by the beneficiary with
with absolute flexibility.
all the credit conditions.
o Therefore, the beneficiary will
accept a revocable letter of credit
not only when he has absolute trust
in the buyer, but also when he
trusts the issuing bank.
Confirmed Letter of Unconfirmed Letter of
Credit Credit

o most secure device because it


o offers a commitment to pay only
offers an unconditional undertaking on the part of the issuing bank.
by two entities;
oWhen the irrevocable letter of
o the advising bank enters into a
commitment to pay that is credit involves a third bank, the
independent of, in addition to, the advising bank, it is only to act on
issuing bank's commitment behalf of the issuing bank for
administrative purposes
The Standby Letters of Credit
• Specialized types of letter of credit is designed to
provide efficiency to certain transactions.

• It is often used in sales transactions to provide the


buyer with a guarantee of performance by the seller,
thus providing the same service as the performance
bond.
The Revolving Letter of Credit.
• This form of letter of credit is adopted
in cases of transactions involving
shipment of goods on a continuing
basis and payment of the total price in
multiple installments of similar
amounts.

• Used in multiple shipments.


The Red Clause Letters of Credit
• The beneficiary is provided with the right to draw certain amounts of money prior
to the execution of his obligation.

• It is a form of financing representing a non collateralized loan to the beneficiary.


Usually it is applied to the benefit of brokers or dealers, who often do not dispose
of the amounts necessary to finance the deal.
The Back-to-back Letters of Credit
• It is used as a basis for the issuance of a second, unrelated, letter of credit or as
financing device.

• the beneficiary who needs to provide guarantees to a third party may pledge the
letter of credit to a bank as collateral for the issuance of a second letter of credit.
In this case, it is the bank, and not the customer, as in the case of the red clause
credit, that trusts the beneficiary of the first letter of credit and believes that he
will comply with the obligations of the first letter of credit.
The Transferrable Letters of Credit
• It is used in cases where there are three parties to a transaction; an Importer
(Buyer), Exporter (Supplier), and an intermediary party, such as a broker, who is
responsible for arranging the sale.

• In such a transaction, the intermediary party requests a Letter of Credit from the
Importer as protection against non-payment. The Exporter, in turn, wants
assurance from the intermediary party that payment will be made, and will also
request a Letter of Credit.
THE

FUNCTION
WHAT IS A ?

It is a legal arrangement in which individual (trustor) gives an authority


to control the property to a person or an institution (trustee) for the
benefit of the beneficiaries.

Trusts are either express or implied. Express trusts are created by


the intention of the trustor, while implied trusts come into by operation
of law.
HOW DOES IT WORK?
CHARACTERISTICS OF A TRUST
• It is fiduciary in nature
• It is a relationship with respect to property, not one involving merely personal
duties.

• It involves the existence of equitable duties imposed upon the holder of the title to
the property to deal with it for the benefit of another.

• Trust accounts are not covered by the Philippine Deposit Insurance


Corporation(PDIC) and losses, if any, shall be exclusively for the account of the
trustor and/or beneficiaries unless directly caused by gross negligence of the
Trustee. Certain placements/investments may be covered by PDIC (i.e. term and
regular deposits only).
BANK’s TRUST DEPARTMENT