Bank Acceptances are bills of exchange issued by companies at their own order, accepted by Multiple Banking institutions based on credits that these Institutions grant to said companies.
A brief bibliographic review to expand the concept:
Definition
Bank acceptances are short-term loans made to importers and exporters that help facilitate international trade. (Emery and others, p.44)
They arise from short-term credit agreements used by companies to finance their transactions. Many times these are transactions with foreign companies or with unknown credit capacity. Normally, a bank agrees to pay the foreign supplier on behalf of the importer, who contractually agrees to return it to the bank within the three to six months it takes to receive and sell the merchandise. The bank can hold acceptance until maturity or sell it at a discount for immediate liquidity. An investor who buys a bank acceptance thus receives a promise that the importer will pay him its face value on a specified future date. As a result of its sale, the bank acceptance becomes a negotiable instrument. (Gitman and Joehnk, p.23)
Fundamental functions of bank acceptances
- As a substitute for bank credit, which allows banks to relieve the pressure exerted by the demand for credit. As a negotiable security, to stimulate the financial and economic development of the country.
Bank acceptances are intended to allow the business sector to obtain quickly and at low cost (economy of administrative procedures), the financing it needs, to strengthen its business.
Mechanism of operation of bank acceptances
- Interested companies go to the opening of a credit line in the bank chosen for it.Once the credit line is approved, a contract is signed in which the term, commissions according to rates of guarantees, guarantees and others are signed. the credit line, the companies issue bills of exchange guaranteed by the bank, which can be drawn on the order of the company itself and endorsed to the buyer.Bank acceptances can be negotiated on the Stock Exchange through the Stock Exchange of the banks.
(Escoto, p.99)
Main characteristics of bank acceptances
- They are documented with bills of exchange, drawn on by the debtor companies, at their own order, which are "accepted" by the credit institution. They are short-term financing instruments, for periods of no more than 360 days, even when maturities Average fluctuate around 90 days. They work with a discount rate, that is, the issuer receives the net amount of the document, after subtracting the corresponding interest; In the case of the investor, he contributes the net amount of the bill of exchange and will receive, upon maturity, its nominal value. The document gives a discount and the rate of return is obtained by dividing the interest received by the net amount contributed. The debtor's cost percent equals the creditor's percent yield.Its risk is lower for the investor than that of some other investment instruments, since this operation, having been “accepted” by the credit institution, is equivalent to the fact that it has granted its guarantee on the issue. These are generally slightly smaller than certificates of deposit and commercial paper and can usually be purchased through a bank or broker.
(Haime, p.163)
Types
There are two types of bank acceptances:
- Private partnerships. Issued and negotiated directly by the banks with the investing public (they are not operated through the Stock Exchange). Public. Issued by public limited companies, guaranteed by banks and registered in the securities section of the National Registry of Securities and Intermediaries.
Finally, we suggest a video in which the concept of bank acceptances is briefly and clearly explained.
Bibliography
- Emery, Douglas R.; Finnerty, John D. and Stowe, John D. Fundamentals of Financial Management. Pearson Education, 2000.Escoto Leiva, Roxana. Commercial Bank. EUNED, 2001. Gitman, Lawrence J. and Joehnk, Michael D. Investing Fundamentals. Pearson Education, 2005. Haime Levy, Luis. Comprehensive Restructuring of Companies as a basis for survival. ISEF Fiscal Editions, 2004.
