Banking Operations: Loans, Credit Accounts & Bills of Exchange

Posted on Sep 12, 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 property being financed.

Features:

  • In case of default, the bank may seize the property, and it will be sold at public auction.
  • It is formalized by a public document, signed by the person granting the mortgage, in any transaction where the 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) (operation performed by experts who estimate the value of a home).
  • 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, allowing the customer to access the money as needed and only pay interest on the amounts actually used.

The most important features of credit accounts are:

  1. The bank acts as the lender of funds requested, and the client acts as the borrower of funds.
  2. The credit policy is the document that formalizes credit accounts.
  3. The bank charges the client start-up costs for the transaction. 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 by the bank for the capital in the credit account that has not been used.
  6. Once the credit account is open, payments can be made, including recurring payments, through it, like a normal current account. The main difference is that interest will have to be paid on the amounts withdrawn.
  7. Income can be deposited into the credit account at any time. It may also exceed the credit account limit if enough money is deposited.
  8. Once the period for which the credit account is provided expires, the customer must repay it 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

a) Interest:

  • In a credit account, interest is paid only on the amounts withdrawn.
  • This does not happen with a bank loan, as the customer receives the total amount at the time of signing and therefore has to pay interest on the total.

b) Limit:

  • The credit account, as we have seen, has a provision limit; there is no limit when it comes to lending.

c) Exceeding the Limit:

  • A credit account can exceed the limit fixed by the bank.

d) Repayment:

  • Upon completion of the credit account, the balance must be replaced so that it again contains the base amount.
  • In loans, this is not the case, since at the end of the contract, nothing should be replaced because the interest has already been paid and the capital has been returned according to the amortized terms.

e) Renewal:

  • The credit account can be renewed once it has reached maturity, while this does not exist for a loan; a new loan must be requested.

Advantages and Settlement of Credit

The most remarkable advantages of this type of operation are:

  • Immediate availability of capital after granting a credit account.
  • 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 & Maturity

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

The clearest example of this is a bill of exchange.

A bill of exchange is a credit payment instrument used in buying and selling. It is a title issued by a seller to a person (buyer) 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 the debt they have with the seller, the bill of exchange is issued by the seller 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 whose title is 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 regulations for 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. Holder or Payee: 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 during 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 indicated 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 as profit on the pending payment.

Fiscal Role of the Bill of Exchange

  • The official bill of exchange model conforms to a format that serves as a settlement for the 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 using the model 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 “from €192.32 to €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 the 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.
    • Bill 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 refers to the day it is issued, when it is drawn up by the drawer.
  3. A set period of time from sight: It can be charged by counting the time since it is accepted.
  4. A fixed date: It can be collected on the date indicated.

Returns of Bills and Management of Collections

  • If the bill reaches maturity and 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 the bills correspond to the following:
    1. Returning the unpaid bill.
    2. Management of the protest.
    3. Management of declaring the default.

Banking Assets

Active operations are those operations by which banks grant 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 credit on accounts or cards.
  • It consists of the bank granting its customer an agreed amount for a certain period of time.

Loans:

The bank lends money to its client with the condition that they repay the amount plus interest within an agreed-upon time 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.