Banking Operations: Loans, Credit Accounts, and Bills of Exchange

Posted on Sep 11, 2024 in Economy

Mortgage Loan

A mortgage loan is a loan from a bank that is guaranteed by a mortgage on a property, usually the same property being financed.

Features:

  • In case of default, the bank may attach to the property, and it will be sold at public auction.
  • It is formalized by a public document, signed by the person who granted it, in a transaction where a notary certifies the contents.

Expenses of Borrower:

  • Opening and Study Commission
  • Notary expenses
  • Interest
  • Subscription of life insurance
  • Commission of early termination
  • Public deed of incorporation of the loan and registration of property
  • Tax on capital transfers and documented legal acts
  • Property valuation (if any)
  • Multi-risk home insurance, at least on the continent.

Credit Accounts

A credit account makes a sum of money available to the client by a deadline. The customer can access the money as needed and only pays interest on the amounts actually used.

Important Features of Credit Accounts:

  1. The bank acts as a lender of funds requested, and the client acts as a borrower of funds.
  2. The credit policy is the document that formalizes credit accounts.
  3. The bank charges start-up costs of the transaction to the client. For example, the opening commission.
  4. Immediately after entering into the transaction, the client has equity in their credit account.
  5. The bank charges a commission of unavailability, which is a small fee charged on the capital in the credit account that has not been used.
  6. Once the credit account is open, payments can be made through it, like a normal current account. The main difference is that interest will be charged on the amounts withdrawn.
  7. Income can be deposited into the credit account at any time. The balance may also exceed the credit account limit if enough money is deposited.
  8. Once the credit account period expires, the customer must pay the balance by depositing enough to return the account to its initial value.
  9. Credit accounts can be renewed upon expiration of their contract if requested by the customer and granted by the bank.

Differences Between Credit and Loan Accounts

  • Interest: In a credit account, interest is paid on the amounts withdrawn. This does not happen with a bank loan, where the customer receives the total amount at the time of signing and pays interest on the total.
  • Limit: The credit account has a provisioned limit, while there is no limit when it comes to lending.
  • Exceeding Limit: A credit account balance can exceed the limit fixed by the bank.
  • Repayment: On completion of the credit account, the balance must be repaid so that it returns to the base amount. In loans, this is not necessary since the interest has already been paid and the capital returned according to the amortization terms.
  • Renewal: The credit account can be renewed once it has reached maturity, while a loan cannot be renewed; a new loan must be requested.

Advantages and Settlement of Credit

Advantages:

  • Immediate availability of capital after a credit account is granted.
  • Flexibility, because the customer can dispose of the limit as needed.
  • Interest accrues only on amounts drawn down.
  • It is an operating account, meaning the customer can deposit or withdraw funds and pay all sorts of household bills.
  • The processing is quick and easy.

The settlement of accounts receivable is carried out by the Hamburg method. Its operation is similar to other passive banking operations.

The Bill of Exchange: Discounting and Maturity

A bill of exchange is a document whereby a person or entity agrees to make a payment at a given future time.

  • The bill of exchange is a payment instrument for credit in purchases and sales. It is a title issued by a drawer to a person ordering them to pay a sum of money to their bank upon maturity.
  • Unlike a check or promissory note, which are issued by the client to repay a debt owed to the seller, the bill of exchange is issued by the vendor to collect the debt.
  • The issuer of the bill may direct that payment be made to other persons designated in the document (endorsement).
  • The bill of exchange is a standardized form approved and issued by the state.
  • It can be purchased at tobacconists and other approved institutions.
  • Act 19/1985 on Bills of Exchange and Checks contains the regulation of this payment instrument.

Figures of the Bill of Exchange

  1. Drawer: The person who issues the bill of exchange and orders payment to another person (seller).
  2. Drawee: The person who is ordered to pay (customer).
  3. Payee or Holder: The person who is in possession of the instrument for collection (bank).
  4. Guarantor: A person who guarantees payment of the bill if the principal fails to do so.

Economic Role of the Bill of Exchange

  • The bill of exchange is, firstly, a means of payment and, secondly, a way to obtain credit. The buyer (customer) delays payment of their purchase until the expiration date of the bill, allowing them to obtain goods in periods when their company has no liquidity.
  • The seller or drawer, once they issue the bill, may:
    • Wait until the expiration of the bill to receive the full amount.
    • Discount the bill at a bank: the bank pays the seller an amount below the limit stated in the title. At maturity, the bank recovers the total amount of the bill. The difference between the amount paid to the seller (bank client) and the amount charged by the bank will be the interest earned on the pending payment.

Fiscal Role of the Bill of Exchange

  • The official bill of exchange form serves as proof of settlement of tax on capital transfers and documented legal acts.
  • Depending on the amount of the bill, the tax will vary.
  • The issuance of a bill of exchange must be made on the form containing the appropriate stamp amount.
  • The minimum amount is”up to €24.04″ for which €0.06 will be paid in tax, and the maximum is”€192,323.87″ for which €0.018 will be paid for every €6.01 (approximately more than €500).

Discounting

  • Companies can perform two types of operations with bills accepted by their customers:
    • Collection management: The bank will not advance the money but simply arranges the collection and therefore does not charge a commission.
    • Discounting: The bill is taken to the bank before maturity and discounted, meaning the bank advances the money.

Most Common Cases of Maturity:

  1. At sight: Can be charged once it is accepted.
  2. A term from the date: The date from which the term is counted, meaning when it is payable, is extended by the drawer.
  3. A set period of time from sight: It can be charged by counting the time since it was accepted.
  4. A fixed date: It can be collected on the date indicated.

Returns of Bills and Management of Collections

  • If, upon maturity of the bill, the drawee does not pay the corresponding amount, the bank will debit the account of its customer (drawer) for the amount of the bill, plus any expenses incurred for the return.
  • The costs for returning bills correspond to the following:
    1. Returning the unpaid bill.
    2. Management of protest.
    3. Management of declaring the default.

Banking Assets

Active operations are those by which banks give credit and loans to their customers, making the latter liable to the banks. Applicants for these loans/credits do so because they have financial needs.

Types of Banking Assets

Credits:

  • They may be revolving credits on accounts or cards.
  • It consists of the bank granting its customer an agreed amount for a certain period.

Loans:

The bank lends money to its client with the condition that they repay the amount plus interest over an agreed period.

Discount of Commercial Bills:

When a company makes a sale, its customer can sign a bill of exchange, which is a document that sets out the amounts payable by the customer, where, and when.