BANKING XII

Theory of Comparative Advantage

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Q.35. What are the assumptions and criticism relating to the theory of comparative advantage? ASSUMPTIONS OF THE THEORY
The comparative cost theory is based on the following assumptions:
i. labour is regarded as the sole factor of production and the cost of production only consists of labour cost.
ii. Production is subject to the law of constant returns.
iii. Factors of production are assumed to the perfectly modile within a country but immobile between countries.
CRITICISM
The theory of comparative cost is criticized on the following grounds.
Assumption of Constant Cost
The classical economists were of the opinion that additional quantities & a commodity could be obtained with the same expenditure of cost per unit us previously But this is not valid assumptions lost ratios are subject to change where specialization between the two countries has gone a pace.
Some Static Assumptions
The comparative cost theory in a number of static assumptions of fixed costs industrial production functions between trading countries and fixed supply of land, labour, capital etc. It cannot be applied 100% to the real world.
Assumption of perfect mobility inside and immobility outside a country
This assumptions seems to be un-applicable to todays modern world of communication and technology the development of cheap quick and safe means of transport and communication has broken down this immobility to a great extent.

Theory of Comparative Costs

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Q.34. Explain in detail the theory of Comparative Costs. INTRODUCTION
The classical theory of International trade commonly known as the principle of comparative cost was first enunciated by David Ricardo. The theory went through many additions improvements and refinements at the hands of economists like Mill, Cairns & Bastable.
An individual is able to perform many tasks but he does not perform them all. He selects that work which pays him the most. A doctor can also do the work of a dispenser but he does not do it. The same principle works in international trade. Considering the climatic conditions, distribution of material resources, geographical concern etc. Every country seems to be better suited for the production of certain articles rather than for others to employ its resources more remuneratively it will be to the advantages of each country as well as to the world.
THEORY
In its simplest form the theory may be stated as, ‘’It pays countries to specialize in the production of those goods in which they possess the greatest comparitve disadvantage.’’
EXPLANATION
Ricardo argued that two countries can gain very well by trading even if one the countries is having an absolute advantage in the production of both the commodities over the country. The condition is ‘’Provided the extent of absolute advantage is different in the two commodities in question’’ i.e. the comparative advantage is greater or comparative is lesses in respect of one good than in that of the other. In this connection we compare not the cost of production of one commodity with the other rather we compare the ratio between the cost of production of the two commodities concerned in one country with the ratio of their cost of production in the other country.
EXAMPLE
Suppose there are two countries A and B and there are two commodities wheat and rice. Suppose a unit of labour produces 10 tons of wheat or 20 tons of rice in country A. The same unit can produce 6 tons of wheat and 18 tons of rice in country B. According to this situation country A is having an absolute advantage in the production of both commodities over B. But she is at a greater comparative advantage in the production of wheat country B is at a disadvantage in both. Commodities the comparative disadvantage is less than case of rice. Hence the ratio would be
In A it is 10 : 20 i.e. 1 : 2
In B it is 06 : 18 i.e. 1 : 3
Therefore, A will specialize in wheat and B in rice and international trade will become possible and profitable. This is the law of comparative advantage or costs.

Advantages and Disadvantages of International Trade

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Q.33. What are the advantages of International trade? Also discuss its disadvantages. ADVANTAGES OF INTERNATIONAL TRADE
Various advantages are named for the countries entering into trade relations on a international scale such as:
A country may import things which it cannot produce
International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade.
Maximum utilization of resources
International trade helps a country to utilize its resources to the maximum limit. If a country does not takes up imports and exports then its resources remain unexplorted. Thus it helps to eliminate the wastage of resources.
Benefit to consumer
Imports and exports of different countries provide opportunities to the consumer to buy and consume those goods which cannot be produced in their own country. They therefore get a diversity in choices.
Reduces trade fluctuations
By making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable.
Utilization of Surplus produce
International trade enables different countries to sell their surplus products to other countries and earn foreign exchange.
Fosters International trade
International trade fosters peace, goodwill and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.
DISADVANTAGES OF INTERNATIONAL TRADE
International trade does not always amount to blessings. It has certain drawbacks also such as:
Import of harmful goods
Foreign trade may lead to import of harmful goods like cigarettes, drugs etc. Which may run the health of the residents of the country. E.g. the people of China suffered greatly through opium imports.
It may exhaust resources
Internation trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources.
Over Specialization
Over Specialization may be disasterous for a country. A substitute may appear and ruin the economic lives of millions.
Danger of Starvation
A country might depend for her food mainly on foreign countries. In times of war there is a serious danger of starvation for such countries.
One country may gain at the expensive of Another
One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century.
It may lead to war
Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and second world war.

International Trade

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Q.32. Why do International trade take place? OR
What are the bases for international trade?
Some of the reasons that why do trade between different countries occur are discussed under the following heads.
NATURAL ENDOWMENTS
Differences in advantages of trade to different countries may arise because of natural reasons like geographical and climatic conditions. This lead to territorial division of labour and localization of industry. This different countries specialize in the production of different things.
HUMAN CAPABILITIES
People in some countries are physically more sturdy where as in others they are intellectually superior. Some have greater skill and dexterity thus the countries. Which do not possess these qualities try to share with them.
STOCK OF CAPITAL
Some countries have large stock of capital goods like U.K, U.S.A, etc. These gives an opportunity to the underdeveloped countries or those which lack these capital goods to exchange or trade them through the channel of distribution internationally.
SPECIALIZATION IN PRODUCTION
A country may have a comparative cost advantage in production in more than one commodity over other countries but produces only one commodity for the sake of specialization. It helps in improving the quality of production to a great extent.

Short Notes

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Q.31. Define the following terms INTERNATIONAL TRADE
International trade refers to that trade that take place between a country and a number of countries of the world. In other words we can say that all the trading activities that take place across the national boundaries is called International or Foreign trade. It is effect is called balance of payments.
INTERNAL TRADE
Internal or Domestic or inter-regional trade is the trade between different regions in the same country. We can also say that all the trading activities that take place within a country is called Internal trade.
ABSOLUTE ADVANTAGE
A country due to its most favourable geographical conditions may have an advantage in the production of a particular commodity over other countries. This advantage is known as absolute advantage for that country over rest of the world. The absolute advantage results in a regular inflow and outflow of goods which gives rise to International Trade.
COMPARATIVE ADVANTAGE
When a country has an advantage of production and move than one commodity it prefers to produce only one commodity that is more advantageous for other. This advantage is calculated by comparing the different commodities that how much they paying commodity is selected and the country goes for specializing. This is known as comparative advantage.

Adverse Balance of Payments

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Q.30. Explain in detail that how are adverse balance of payments can be corrected? METHODS OF CORRECTING AN ADVERSE BALANCE OF PAYMENTS
Following are same of the methods adopted for correcting and adverse balance of payments.
Improving the balance of trade through import restrictions & measures of export promotions
Since balance of payments becomes adverse because of excess imports over exports, so a country having such a problem must try to check imports either by total prohibition or by levying import duties so by a quota system. Another method may be import substitution i.e. trying to produce in the country what it currently imports. Exports can be stimulated by measures of export promotion granting subsidies or other concessions to industrialists and exports.
Depreciation of the currency
If a country depreciates its currency it proves very helpful in increasing the exports of goods. The value of the home currency fall relatively to foreign currency hence the foreigners are able to buy move goods with the same amount of their own currency or for the same amount of goods they have to pay less in terms of their own currency than before.
Devaluation
A country can turn the balance of payments in its favour by devaluating her currency. In this case also the devalued currency will become cheaper in terms of the foreign currency and the foreigners will be able to buy move goods by paying the same amount of their own currency. The effect is the same as in the case of depreciation.
Deflation
Deflation means construction of currency. If currency is contracted then according to the quantity theory of money the value of the currency will rise or the prices will fall. When prices fall the country becomes a good country to buy in and not a good country to sell into Exports will also thus increase and imports will be checked and hence the balance of trade will become favourable.
Exchange Control
Under a system of exchange control, all exporters are asked to surrender their claims or foreign currencies to the central bank which pays in return the home currency, which the exporters really want. This available foreign exchange is rationed by the central bank among the licenced importers. Thus imports are restricted to the foreign exchange available. There is no danger of more goods being imported than exported

Balance of Payment

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Q.29. Write a detailed note on Balance of Payments. BALANCE OF PAYMENTS
Each nation periodically publishes a set of statistics that summarize for a given period all economic transactions between its residents and the outside world. This statistical statement is referred to as balance of payments. The accounts show how a nation has financed its internation activities during the reporting period. They also show that what changes have taken place in the nations financial claims and obligations with the rest of the world.
STANDARD PRESENTATION
The IMF has significantly worked with success to standardize the system and the form of presentation.
B.O.P – DOUBLE ENTRY ACCOUNT
The B.O.P used double entry accounting. Transactions are recorded as credits of the yield receipts from or claims against foreign owners. Credits are received for example by exports of merchandise, sale of securities overseas and rendering services to foreigners. Similarly, debits are recorded of transactions cause payments to foreigners e.g. importing goods, tourist expenses abroad, purchase of foreign bonds.
B.O.P – CURRENT ACCOUNT
The Current Account uncludes merchandise trade in good and International Services are termed as Invisible trade. There are four basic service components. Tourism, Investment, Private Sector, Services such as royalties, rent, consulting and engineering fees etc and Government services such as diplomatic and buildings and membership fees in international organizations.
B.O.P – CAPITAL ACCOUNT
The capital account has a long term and a short term sector. The long term amount shows the inflow and outflow of capital commitments which have a maturity longer than a year. Short term capital movement frequently have a maturity date from 30-90 days. Long term capital items generally include loans to and from other governments, financial support for development. Projects abroad and export financing. Short term capital include paying for international services, selling accounts etc.

Balance of Trade

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Q.28. Define Balance of Trade BALANCE OF TRADE
Balance of trade refers to the difference in the value of imports and exports of commodities only i.e. visible items only. Movements of goods between countries is known as visible trade because the movement is open and can be verified by the custom officials with respect to balance of trade the following terminologies are important.
Balanced Balance of Trade
If during a given years exports and imports of the country are equal the balance of trade is said to be Balanced.
Favourable Balance of Trade
If the value of exports exceeds the value of imports the country is said to experience an export surplus or favourable balance of trade.
Un-Favourable Balance of Trade
If the value of imports exceeds the value of its exports the country is said to have a deficit or an adverse balance of trade.

Direct and Indirect Methods Adopted of Exchange Control

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Q.27. Compare the direct and Indirect methods adopted of exchange control.
COMPARISON OF DIRECT & INDIRECT METHODS

These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.

Foreign Exchange

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Q.26. How does a country controls its foreign exchange? METHODS OF EXCHANGE CONTROL
Paul Einzig is his book exchange controls has mentioned as many as 41 different methods of exchange control. They can be categorized as
1. Direct Method
2. Indirect Method
They are discussed here as under.
1. DIRECT METHOD
The direct method are further classified as:
Intervention
For an effective control of foreign exchange rates and the foreign exchange market the government usually have a central authority i.e. the Central Bank that has the complete power to control and regulate the foreign exchange market. Under this method any body who either wants to purchase or sell foreign exchange he has to deal with the central bank. All the selling and purchasing transactions of foreign exchange is controlled by the central bank which helps it to adjust demand and supply of foreign exchange according to the need of the country.
Restriction
Exchange restriction is another powerful weapon of exchange control. It refers to the policy by which the government restricts the supply of its currencies coming into the exchange market. It is achieved either by one of the following methods.
i. By centralizing all trading in foreign exchange with central bank of the country.
ii. To prevent the exchange of national currency against foreign currency with the permission of the government.
iii. By making all foreign exchange transactions through the agency of the government.
Exchange Clearing Agreement
Under this method the countries engaged in trade pay to their respective central bank the amounts payable to their respective foreign creditors. The central banks they use the money in off setting the corresponding claims after fixing the value of the foreign currencies by common agreement. The basic principle is to offset international payments so that they have not to be settled through the medium of the foreign exchange market.
2. INDIRECT METHODS
The most commonly used direct method or tool of exchange control is the use of tariff duties and quotes and other quantative restrictions on the volume of international trade. By imposing tariff and quotes the demand for the foreign currency falls down in the case of restricting the imports.
Rate of Interest
Another method of indirect exchange is the rate interest. The rate of exchange is the result of demand and supply of each other currencies arising out of trade and capital movement. A high rate of interest in a country attracts short term capital from other countries that leads to a exchange rate for the currency in terms of other currencies goes up.

OBJECTIVES OF EXCHANGE CONTROL

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Q.25. Identify the objectives of exchanges control? OBJECTIVES OF EXCHANGE CONTROL
The following are some of the objectives of exchange control.
To restore Equilibrium
The chief objective of exchange control is to restore equilibrium in its balance of payments. If a country finds that its balance of trade has been persistently unfavourable then it must do something set it right. The balance of payment must ultimately be made to balance.
To Protest Home Industries
Another objective of exchange control is to protect the home industry from unfettered competition from abroad if the people at home are more interested in purchasing foreign goods it will ultimately discourage the local producers to produce more. It will directly affect the National Income and the domestic Gross Product of the country.
To Conserve Foreign Reserves
To conserve foreign reserve is another major objective of exchange control. Every Country needs foreign exchange in order to maintain its stability monetarily in the present age. Also the countries need foreign exchange to make payments for their imports and to pay back their debts obligation. For this a country must have foreign currencies on their hand. If there is a deficiency of the foreign exchange it is going to affect its liquidity position internationally and its credit rating.

Fluctuation in Rate of Exchange

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Q.24. What are the causes of fluctuation in the rate of exchange of a country? The rate of exchange fluctuates in the market due to interplay of demand and supply of currency of a particular country. This is the result of some of the following transactions.
BALANCE OF TRADE
The main reason for fluctuations in the rate of exchange of the currency is the value of imports and exports of a country. If the value of imports exceeds the value of exports the rate of exchange will lend downwards and vice versa.
FOREIGN INVESTMENT
Foreign capital investment in a country necessities the payment of dividends or interest to the investing countries. If the capital absorbing country is not in a position to pay such claims in foreign currency, the rate of exchange of that country will definitely fall down.
SERVICE CHARGES
Freight and Insurance expenses also fluctuates the rate of exchange of a country. If the importing country does not have her own shipping companies the transportation charges are to be paid to foreign ships. So the insurance premium in case is to be paid to foreign companies. This creates a demand of foreign currency and if the supply is limited the rate of exchange will fall.

Rate of Exchange

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Q.23(A). Define the term rate of exchange. Q.23(B). Explain how the rate of exchange is determined?
RATE OF EXCHANGE
The rate at which the currency or monetary unit of one country can be exchanged with the monetary unit of other country is called the rate of exchange. In other words, the rate at which a unit of one country exchanges for the currency of another is the rate of exchange between them. It may be used to denote the system whereby the trading nations pay off their debts.
Determination of Rate of Exchange
The rate of exchange is determined under the following under the following money systems as:
Under Gold Standard
If two currencies are on gold standard and if their currencies are expressed in terms of gold i.e. a certain weight of gold then the rate of exchange is determined by reference to the gold contents of the two currencies. Suppose Pakistan and United States are on gold standard the rupee being equal to 10 grams of gold and dollar consisting of 50 grams of gold. The rate of exchange between the two countries will be
1 Rupee = 10/50 = 1/5 $ or 0.20 cents
1 Dollar = 50/10 = 5 Rupees.
Thus the rate of exchange is determined in a direct manner by comparison between the gold contents of the two countries. This rate of exchange is also known as Mint Par of Exchange. The actual rate in the foreign exchange market will be slightly different from the mint par to allow for certain expenses. However the actual rate of exchange between currencies will not depart much from the mint par and will move between the two points of export and import of gold. These points are called Gold Points.
Under Paper Currency Method
This phenomenon of exchange rates determination is also called Purchasing Power Parity Theory. No country in the world is rich enough to have a free gold standard. All countries nowadays have paper currencies. According to this theory the rate of exchange between two countries depend upon the relative purchasing powers of their respective currencies. Such will be the rate which will equate the two purchasing powers.
For example if a certain assortment of goods can be purchased for ₤ 1 in Britain and a Similar assortment of goods with Rs. 16 in Pakistan then the purchasing power of ₤ 1 is equal to the purchasing power of Rs. 16. Thus the rate of exchange according to purchasing power parity theory will be
₤ 1 = Rs.16

Renewal and Retirement of a Bill of Exchange

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Q.22. What is Renewal and Retirement of a bill of exchange? RENEWAL OF THE BILL
Sometimes the drawee of the bill is unable to pay the bill on its agreed date or time. In such a situation the drawee can apply to issue a new bill subject to certain conditions after the agreement of the drawer. This issuance of a new bill for some new time is known as renewal of the bill. After the issuance of the bill the former is considered to be cancelled. But if the drawee again unables to pay the newly issued bill, the first bill with all its farmer conditions becomes payable and valid.
RETIREMENT OF THE BILL
Sometimes the drawee pays the bill before the agreed date enjoying the rebate which is provided to him for prepayment of the bill. This is known as retirement of the bill. The amount of the rebate depends upon the time left for payment and the amount for which the bill is drawn.

NOTING OF THE BILL

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Q.21. What do you mean by Noting of the Bill? NOTING OF THE BILL
When the bill of exchange is dishonoured by the party, the holder of the bill has a legal right to take action against them. In this regard he prepares a type of Public Notice. It is known as Notery Public which is attached along with the bill and is again presented for repayment. Usually this entry of the bill is made on a separate attached with the bill. If the payment is not made i.e. refused again then the date of the presentation the reference of the register with his signature is entered in the notice. This is called Notice of the Bill.
PROTESTING OF THE BILL
Sometimes due to refusal of payment a certificate or document is issued by the notary public containing all the information about the dishonour. This document is known as protest of the bill. It contains
i. Attested copy of the bill.
ii. Signature of Notery Public.
iii. The name of the person whose bill was protested.
iv. The date and amount of the protest.
v. The cause of the protest.
vi. The reply of the drawee.
vii. The reason of absence of the drawee and the accepted.
viii. The reason for the non-payment of the bill.
ix. The certificate stamp of the notery public.

Circumstances a Bill of Exchange is Dishonoured

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Q.20. Under what circumstances a bill of exchange is dishonoured When a bill of exchange is drawn in the favour of a specified person or firm, it is not necessary that the bill will be accepted. Due to some complexities the drawee does not accept the bill. The circumstances under which a bill of exchange is dishonoured are as follows.
Dishonour By Non-Acceptance
When a bill of exchange is drawn against the drawee and the drawee defuses to accept the same, this refused is called dishonour by non-acceptance.
Dishonour By Non-Payment
When the bill is presented to the drawee for its payment, sometimes the drawee fails to pays it. This failure of the drawee to the payment of the bill dishonours the bill by non-payment. In such a situation the drawer of the bill holds the complete right to take lawful action against the drawer.

Drafting a Bill of Exchange

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Q.19. How does a bill of exchange is drafted? While drafting a bill of exchange the following are necessary.
i. STAMP
To prepare a bill of exchange in the form of a legal document, the drawer of the bill has to pay a tax to the Government which is accepted by issuing a stamp. The value of the stamp depends upon the amount for which the bill has been drawn.
ii. AMOUNT PAYABLE
The amount payable should be written clearly. It is necessary that the amount should be written in words and figures.
iii. DATE
The date on which the bill is being drawn or prepare should be posted accurately. The date is usually written on the upper side of the bill.
iv. NAME OF THE DRAWEE
It is necessary that the name of the drawee should be mentioned in the bill. The words ‘’OR ORDER OR BEARER’’’ indicate the persons to whom the bill has to be paid.
v. FOR VALUE RECEIVED
A bill of exchange is always drawn against a certain amount or value. Therefore the words ‘’For Value Received’’’ should always be written on the bill.
vi. SIGNATURE OF THE DRAWEE
A bill lacking the signature of the drawer is unacceptable and unlawful. Such type of a bill can be dishonoured. That is why the structure of the drawer are essential.
vii. NAME & ADDRESS OF THE DRAWEE
The closing of the bill includes the name and address of the drawee. It is written on the left side corner of the bill.

Essentials of a Bill of Exchange

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Q.18. What are the essentials of a bill of exchange?
ESSENTIALS OF A BILL OF EXCHANGE

The following are the essentials of a bill of exchange.

i. It must be in writing.
ii. It must be an unconditional order to pay.
iii. It must be signed by the maker.
iv. It must be addressed by one person to another.
v. It must be written for some certain sum of money.
vi. It must be payable on demand.

Parties to a Bill of Exchange

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Q.17. Who are the parties to a Bill of Exchange?
The parties to a bill of exchange are given below:

i. The Drawer who prepares the bill.
ii. The Drawee in whose name the bill has been drawn.
iii. The Payee to whom the bill has to be paid.
iv. The Endorsee to whom the bill has been transferred by way of endorsement by the payee.

BILL OF EXCHANGE

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Q.16. Define a bill of exchange and its different kinds. BILL OF EXCHANGE
A bill of exchange is a written acknowledgment of a debt. It is written by the credit and accepted by the debtor. Section 5 of the Act define a bill of exchange as ‘’An instrument in writing containing an unconditional order, signed by the makers directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.
Kinds of Bill of Exchange
A bill of exchange is of the following types.
i. Inland Bill
A bill of exchange which is drawn in a country and is payable anywhere in the same is called an Inland Bill. For example if a bill is drawn in Pakistan and is payable in any city of the country it will be considered as an Inland Bill.
ii. Foreign Bill
If a bill is drawn in one country but is payable in any other country, this type of bill of exchange is called a foreign bill. For example it has been drawn by a businessman in Pakistan in the name of other businessman living in Japan, the payment of the bill of exchange will be among the two businessman of different nations therefore this kind of bill of exchange is called Foreign Bill.
iii. Commercial Bill
A bill which is drawn for business purposes is called a Commercial bill. Sometimes a businessman does not pay in cash but issues a bill which is payable in some future date such type of a bill is called a Commercial Bill.
iv. Accomodation Bill
An accommodation bill is a bill whereof the acceptor according to the terms of the instrument stands as a surety for some other person who may or may not be a party thereto.
v. Time Bill
These are such type of bills which are payable on demand on some specified dates. These specified dates may be of present or future.
vi. Demand Bill
The bills which are payable on demand are called demand bills. Such type of bills are generally used for specific purposes.

Short Notes

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Q.15. Write Short Notes. PROMISSORY NOTE
The promissory note is one of the simplest forms of the credit instrument. Section 4 of the Act defines a Promissory Note as an instrument in writing not being bank note or a currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the orders of a certain person to the bearer of the instrument.
Characteristics of a Promissory Note
The essential characteristics of a promissory note are as follows
i. It is a written document signed as follows.
ii. It contains an unconditional promise to pay.
iii. Besides an acknowledgement a promissory note is an express promise to pay.
iv. Promissory note must always relate to a definite and certain amount of legal money of the country and not to foreign money.
v. It should not be a bank note or currency note.
vi. No particular from is prescribed for it.
vii. A promissory note is not payable to the bearer on demand.
viii. The person to whom the promise is made must be definite person.
DRAFT
A draft is a cheque drawn by one branch of a bank upon another situated at any other place required to pay a fixed / certain amount of money to a specified person or by his order. A bank draft may either by inland or foreign. Drafts are issued by banders after receiving written and signed applications. The person is required to remit the required amount of money along with its commission. The banker hands over the draft to the depositors and sends a credit advice to the branch upon which the draft is drawn.
Draft are a common media of transferring money from one place to another. They are of great importance for financing trade, specially foreign trade. The draft are also known as demand draft.
LETTER OF CREDIT
The letter of credit is a request made by the issuing bank to its correspondent or agent making the request on demand on any draft on the issuing bank up to the amount mentioned in the letter of credit. A letter of credit remain enforced for a fixed date only. They are issued only to the persons who furnish guarantee or securities or make payment of the full amount there in. The L.C’s are of great significance in international trade. Specially the importers and exporters frequently use them. It saves from the trouble of carrying money from place to place with the risk of loss or theft.

CROSSING OF A CHEQUE

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Q.14. What do you understand by the term Crossing of a Cheque? CROSSING OF A CHEQUE
A Crossing is a direction to the paying banker that the cheque should be paid only is a specified banker named in crossing. A cheque is said to be crossed when it bears across it is face the transfers lines without any words on them.
Crossing prevents the cheque from being cashed by anyone except the payee. This ensures safety of payment by means of cheques. It affords security and protection to the true corner. Cheques are crossed in order to avoid losses arising from open cheques. However it does not affect the negotiability of a cheque.

ENDORSEMENT

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Q.13 (A). Define Endorsement. Q.13 (B). What are the different kinds of Endorsement?
ENDORSEMENT
The word Endorsement has been derive from the latin word ‘’Indorsum’’ which means ‘’On the back’’. Anything written or printed on the back of a deed or instruments is called endorsement. When the member or holder signs his name on the negotiable instrument for the purpose of negotiation i.e. direction to pay the amount to another person is called Endorsement. Section 15 of the Negotiable Instrument Act 1881 defines Endorsement as
When the maker or holder of a negotiable instrument sign the same, otherwise than as such maker for the purpose of negotiation on the back or face therefore on a slip of paper or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument he is said to endorse the same and he is called the endorse.
KINDS OF ENDORSEMENT
Different kinds of Endorsement are as follows.
i. Blank or General Endorsement
When the endorser simply put his signature on the back of the instrument without specifying the name of the endorsee, it is said to be general endorsement. The holder can convert it in full endorsement by writing the name of the payee above the signature of the endorsee.
ii. Special or Full Endorsement
It specifies in addition to the signature of the endorser the person to whom or to whose order the instrument is payable.
iii. Restrictive Endorsement
An endorsement which prohibited further negotiation of the instrument is called restrictive endorsement. For instance if a cheque is endorsed saying “Pay A only” or “Pay A for A/C of B” the endorsed has no power to transfer his right further.
iv. Partial Endorsement
An endorsement which makes the transfer of the instrument from the endorser to the endorsee after the fulfillment of stated conditions is called Partial Endorsement.
Sans Recourse
When a person wants to exclude his liability to the endorse or any subsequent holder in case of dishonour of the instrument. The Endorser fees himself from his liability on a negotiable instrument by writing the words SANS RECOURSE after the name of the endorsee. He should make it clean that he endorsee or the holder should not look to him for payment in case of the dishonour of the instrument. The endorsee may refuse to take an instrument with such an endorsement.

DISHONOUR OF A CHEQUE

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Q.12 (A). What do you mean by Dishonour of a cheque. Q.12 (B). Under what circumstances a cheque is said to be dishonoured.
DISHONOUR OF A CHEQUE
The relation between a banker and his customer is that of a debtor and a creditor. Money deposited will always belong to the customer and the bank will be bound to return its equivalent to the customer or to any person to his order. But in certain cases a banker refuses to honour his customers cheque. When the payment of the cheque is refused by the bank, it is said to be dishonoured.
REASONS FOR DISHONOUR
A cheque may be dishonoured under the following circumstances.
i. When balance to the credit of the customer is insufficient to meet the cheque.
ii. When money deposited cannot be withdrawn on demand in the case of fixed deposit.
iii. When the customer closes the account before the cheque is presented for encashment.
iv. When the cheque is not properly drawn.
v. If the cheque is crossed but presented on counter for the payment.
vi. When the cheque is post dated.
vii. If death information of the A/C holder is received.
viii. If the A/C holder is declared insolvent by the law.
ix. If the A/C holder has stopped the payment.
x. If the signature on the cheque is different with the specimen signature.
xi. If the amount written in figures is different from the amount written in words.
xii. If the cheque is presented for payment at a branch other than the one where the customer has the account.

Kinds of Cheque

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Q.11. Define the different types / kinds of a cheque. TYPES / KINDS OF A CHEQUE
Cheque may be of different types. Some of them are
Order Cheque
Order Cheque is a which is expressed to be so payable or which is expressed to be payable to a particular person without containing words prohibiting transfer or indicating that it will not be transferable.
Open Cheque
They are payable in cash at the counter of the banks to the bearer of the cheque.
Crossed Cheque
These type of cheques are not encashed at the counter but which can be collected only by a bank from the drawer bank. But these days an individual can also draw a crossed cheque for the purpose of safety and security in certain cases.
Bearer Cheque
A bearer cheque is that which can be cashed for the bank by the bearer of the cheque. Any person who is in possession of a bearer cheque can cash it without any difficulty.