Banker’s acceptance

1. Submitted To: Submitted By:
Mrs. Harpreet Kaur Gurpreet Kaur
Manpreet Kaur
MBA 4th sem

2. INTRODUCTION
 It is a means of providing finance 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 bank’s
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 bank’s own funds. This is done by creating
a negotiable instrument with a specified maturity date which can be
sold at a discount to investors.
 The bank stamps “accepted” across the draft with authorized signatures.

3. Bankers Acceptance
Bankers Acceptance
Definition – negotiable instrument or time
draft drawn on and accepted by a bank.
Before acceptance the draft is not an obligation of the bank it is merely an
order by the drawer to the bank to pay a specified sum of money on a
specific date to a named person or to the bearer of the draft.
Upon acceptance the draft becomes liability of the bank, The company’s
bank stamps the Note “Accepted” and charges the company a stamping fee

4. Steps Involved in Banker’s Acceptances
 First, the U.S. importer places a purchase order for
goods
 The importer asks its bank to issue a letter of credit
(L/C) on its behalf
 Represents a commitment by that bank to back the
payment owed to the foreign exporter
 The L/C is presented to the exporter’s bank
 The exporter sends the goods to the importer and the
shipping documents to its bank
 The shipping documents are passed along to the
importer’s bank

5. Sequence of Steps in the Creation of A
Banker’s Acceptance

6. Characteristics of Banker’s Acceptance
Credit Quality
LiquidityMarketability

7. Risks Associated With Banker’s Acceptance
Transaction
Risk
Compliance risk
Credit Risk Liquidity Risk
Foreign
Currency
Translation Risk
Reputation Risk

8. Advantages to Banker’s Acceptances
1. Smaller companies gain access to lower rates in the
money market
2. Bank earns a stamping fee to offset the loss of
interest income on their traditional lending activities
3. The BA facility is “carved out” of the borrower’s line
of credit – thus risk to the bank is identical to
lending under an operating line of credit
4. Bank guarantees payment of the Note at maturity –
provides confidence to the market