This document defines and explains several common banking and finance terms: Letters of credit are documents issued by banks to ensure payment in international transactions. They guarantee payment to sellers regardless of whether the buyer pays. Letters of guarantee are contracts where banks promise to meet financial obligations if a customer defaults on a purchase contract. Pledges involve using goods like property as collateral for a loan. If the loan is not repaid, banks can sell the pledged assets. Hypothecation creates a charge over movable assets like vehicles to secure a loan, without transferring ownership. Mortgages use real property like homes as loan collateral, allowing buyers to purchase homes using the loan amount.

1. banking
terminology
By :-Saurabh Bhati
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2. Letter of Credit
Letters of credit are often used in international
transactions to ensure that payment will be received.
A letter of credit is a document issued by a financial
institution, or a similar party, assuring payment to a
seller of goods and/or services. The document serves
essentially as a guarantee to the seller that it will be
paid by the issuer of the letter of credit regardless of
whether the buyer ultimately fails to pay.

4. Letter of guarantee
A type of contract issued by a bank on behalf of a
customer who has entered a contract to purchase
goods from a supplier and promises to meet any
financial obligations to the supplier in the event of
default.
A letter from a bank stating that a customer owns a
particular security and that the bank will guarantee
delivery of the security.

5. Pledge
Section 172 of the India Contract Act, 1872 defines
pledge as “bailment of goods as security for the
payment of debt or performance of a promise”.
• The banker can retain the goods for the payment of the
debt, for any interest or expenses
• In case of non-payment, the banker has the right to sell the
goods and recover the amount of loan along with the interest
and expenses.
• A pledged asset is returned to the borrower when all
conditions of the debt have be satisfied.

6. Hypothecation
Hypothecation is method of creating a charge over the movable
assets, nether ownership or possession of goods is transferred to
the creditor but an equitable charge is created in favour of the
clatter. The borrower retains ownership of the collateral, but it is
"hypothetically" controlled by the creditor in that they have the
right to seize possession if the borrower defaults.
A common example occurs when consumers enter into
a hypothetical agreement, where their car becomes collateral
until the bank loan is paid off.

8. Mortgage
A mortgage is a way to use one's real property, like land, a
house, or a building, as a guarantee for a loan to get
money. Many people do this to buy the home they use for
mortgage: the loan provides them the money to buy the
house and the loan is guaranteed by the house.
In a mortgage, there is a debtor and a creditor. The debtor is
the owner of the property, while the creditor is the owner of
the loan. When the mortgage transaction is made, the debtor
gets the money with the loan, and promises to pay the loan.
The creditor will receive money back with interest over time.

9. Term Loan
A term loan is a monetary loan that is repaid in regular payments
over a set period of time. Term loans usually last between one
and ten years, but may last as long as 30 years in some cases. A
term loan usually involves an unfixed interest rate that will add
additional balance to be repaid.
Term loans can be given on an individual basis but are often used
for small business loans. The ability to repay over a long period
of time is attractive for new or expanding enterprises, as the
assumption is that they will increase their profit over time. Term
loans are a good way of quickly increasing capital. Term loans
are used for purchase of capital assets, for
expansion, modernization or diversification.

10. Lease Financing
A lease transaction is a commercial arrangement whereby an
equipment owner or Manufacturer conveys to the equipment user
the right to use the equipment in return for a rental. The
advantages are: The lessee gets the asset fully financed and the
rent paid are charged as expenditure against the revenue he earns
and therefore fully allowed for tax assessments. The lessor gets
the depreciation benefits which he can claim for deduction
against the lease rental income in his tax assessments.
Lease financing is based on the observation made by Donald B.
Grant:
“Why own a cow when the milk is so cheap? All you really need
is milk and not the cow.”

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