CHAPTER TEN

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CHAPTER TEN

• BANKERS ACCEPTANCE

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• It is a means of providing financing for
  international trade and creating a unique
  financial instrument that is attractive to money
  market investors. It facilitates and expands the
  sources of credits beyond a commercial bank.
• A bankers acceptance is a time draft drawn by one
  party (the drawer) on a bank (the drawee) and
  accepted by the bank as the banks commitment to
  pay a third party (the payee) a stated sum on a
  specified future date. The bank promises to pay
  the draft at maturity. The bank creating an
  acceptance becomes primarily liable for the
  payment on the maturity date.
• Through the bankers acceptance banks can provide
  credit to their customers without using the
  banks own funds. This is done by creating a
  negotiable instrument with a specified maturity
  date which can be sold at a discount to
  investors.
• Figure 10.1 Bankers Acceptance
• The bank stamps accepted across the draft as
  shown in figure 10.1 with authorized signatures.

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• Parties involved are
• The borrower. The importer (sight or time draft)
• The seller. The exporter (sight or time draft)
• The bank (own funds or lending)
• The broker. Establishes contact between the
  people who wants to sell and buy bankers
  acceptances.
• The investor. The person who buys the bankers
  acceptance in order to gain higher rate of return
  than time accounts or banks certificate of
  deposits.

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• ELIGBLE BANKERS ACCEPTANCE
• In the USA bankers acceptance drawn in
  accordance with the Federal Reserve Act are
  eligible for discount or purchase by a Federal
  Reserve Member bank at any of the Federal Reserve
  Banks. Usually they are discounting in private
  trading market.
• The conditions which are mentioned in the Fed
  Reserve Act are
• Importation or exportation of goods
• Domestic shipment of goods
• Storage of readily marketable staples
• Bankers acceptance may be created for maximum
  term of six months.
• Eligible bankers acceptance is exempt from
  reserve requirements and deposits insurance. A
  national bank may have bankers acceptances
  outstanding up to 150 of the banks capital.