LAW5802 Banking and Negotiable Instruments — Unit 6: Bank Lending and Security

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Unit 6: Bank Lending and Security

6.1 Lending as Facilities and Its Repayment

6.1.1 Draw Down and Demand Facilities

Draw-down facility: the borrower takes the loan in installments per an agreed schedule (term loan, project credit).
Demand facility: the bank may call repayment at any time (overdraft, demand loan). Demand facilities suit working capital; draw-down facilities suit capital expenditure.

6.1.2 Obligation to Lend

A sanction is not a promise to disburse beyond terms. The bank must honour its facility letter while conditions continue; it may decline draw-downs where conditions precedent are unmet, covenants are broken, or events of default exist. “No obligation to lend” is the general rule before sanction; after sanction, the contract’s terms govern.

6.1.3 Repayment and Interest

Repayment follows the schedule (EMI, bullet, revolving) with interest at the agreed rate within NRB’s directive corridor. Default interest and recall rights follow the agreement. Interest is the price of credit and the bank’s core earning: the spread between deposit cost and lending rate.

6.2 Trade Finance

6.2.1 Bill of Exchange

An unconditional order in writing, signed by the drawer, directing the drawee to pay a certain sum on demand or at a fixed time to, or to the order of, a payee (Negotiable Instruments Act, 2034). The accepted bill becomes the drawee’s own obligation — acceptance converts an order into a promise.

6.2.2 Trade Bills

Short-term paper from trade: commercial bills and usance bills discounted by the bank, giving the seller immediate cash and the bank self-liquidating paper tied to goods’ movement.

6.2.3 Acceptance of Credit

The bank accepts bills for a customer (acceptance credit), lending its name instead of money; the customer must fund the bank before maturity.

6.3 Letter of Credit

6.3.1 Basic Features

The documentary credit: the issuing bank undertakes to the beneficiary (seller) to pay against presentation of documents conforming to the credit’s terms. The chain: buyer (applicant) → issuing bank → advising bank → beneficiary; documents travel the reverse way; goods never need inspection by the banks — documents, not goods, are the currency of an LC.

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