Meaning of Credit Instruments

The word "credit" implies "trust." Economic transactions in the market occur both in cash and on credit. When a consumer purchases goods and services and makes immediate cash payments to the seller, it is called a cash transaction. If the consumer purchases goods with a promise to pay the price in the future, it is considered a credit or loan transaction. 

A credit transaction where the price of goods is paid in the future requires trust between the consumer and the seller. Thus, credit refers to a person's power based on which they can obtain goods and services from the seller on the trust of future payment.

In our daily lives, transactions of goods and services occur not only in cash but also on credit. Various types of credit instruments are used for such credit transactions. Credit instruments are official documents used between buyers and sellers, which, based on mutual trust, help in exchange by being used in place of money. 

For example, checks, drafts, hundis, etc., although not as universally accepted as money, are used in limited areas as they are optional in nature. As they are a type of optional instrument in the exchange market, accepting or not accepting them depends on the individual's choice.

Examples of Credit Instruments

1. Check/ Cheque

A cheque is the most commonly used credit instrument. It is also considered an unconditional order. A person or firm that opens a bank account and deposits money can use it. 

Only the person whose signature is used to open the bank account can sign the check and withdraw the amount indicated on the check from the bank themselves or by presenting it to the bank through their authorized person. 

This includes bearer checks, ordered checks, and crossed checks.

2. Promissory Note

A promissory note refers to a document signed with a promise to pay a specified amount without any conditions to a specific person mentioned in the note, or their representative, or the bearer of the note, either on a specified date or upon demand. 

In this document or order, the person writing the note promises to pay the amount mentioned in the promissory note to the payee after a certain period. 

In a promissory note, the person writing the note is called the drawer, and the person promised to be paid is called the payee.

3. Bill of Exchange

A bill of exchange refers to a document signed by one person directing another person to pay a specified amount without any conditions to a specific person mentioned in the note, or their designated person, or the bearer of the note, either on a specified date, after a certain period, or upon demand. 

This is an order from a seller to a buyer to pay a certain amount. It involves three parties: the drawer, the drawee, and the payee.

4. Bank Draft

A bank draft is an order from a bank to its branch or another bank to pay the amount mentioned in the draft to the specified person, their designated person, or the bearer. Bank drafts are used to conduct transactions with people, institutions, or business parties located far away. 

The bank creates a draft mentioning the name, address, and amount of the person or party sending the money, who is to receive the money, and directs them to withdraw the money from the specified bank. 

The person receiving the draft can go to the concerned bank and receive the amount mentioned in the draft.

Importance of Credit Instruments

Credit instruments are considered the carriers of the modern business era. Their importance can be clarified by the following points:

1. Economy in the Use of Metals

   The widespread use of credit instruments reduces the use of precious metals used as money. As a result, there is an economy in the use of metals.

2. Safe Transaction and Transportation of Money

   In our daily lives, the use of credit instruments has made sending and receiving money from one place to another safe and convenient. Metal money is very heavy to transport, and paper money is also unsafe. Credit instruments are very safe, economical, and simple in this regard, and their importance is increasing day by day in the business world.

3. Encouragement of Savings and Banking Services

   The increasing prevalence of credit instruments has developed the habit of saving among the general public and expanded banking services. People deposit their savings in banks, and based on this, banks create credit. Therefore, the encouragement and development of savings and banking services go hand in hand. The more capital is used through credit instruments, the more small capital is created, which is significant in expanding business transactions.

4. Assistance in Economic Progress

   Capital is required to open industries and conduct business activities in the country. When there is a need for capital, traders can obtain capital by borrowing from banks through credit instruments and invest in various industries and businesses. This helps in the country's production and economic progress.

5. Progress of Trade and Business

   Credit instruments help in conducting transactions of goods without cash in the field of trade. The use of bills of exchange also helps in international trade. Credit instruments help in conducting large-scale transactions without using cash. Therefore, credit instruments have a significant contribution to the progress of trade and business.