CHAPTER TEN
BANKER’S 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.
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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.
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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.
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Figure 10.1 Banker’s Acceptance
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The bank stamps “accepted” across the draft as shown in figure
10.1 with authorized signatures.
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 bank’s certificate of deposits.
ELIGBLE BANKER’S ACCEPTANCE
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In the USA banker’s 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:
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Importation or exportation of goods
Domestic shipment of goods
Storage of readily marketable staples
Banker’s acceptance may be created for maximum term of six
months.
Eligible banker’s acceptance is exempt from reserve requirements
and deposits insurance. A national bank may have banker’s
acceptances outstanding up to 150% of the banks capital.