In passing on an offering the most important thing to know is the credit of the drawer. He is primarily responsible. Legally he is bound to take up the draft if and when it is not duly paid by the drawee. If the purchase is made from an indorser, the drawer's account becomes secondary, for the bank can then seek reimbursement both from drawer and from indorser, or from either. The indorser's credit is therefore scrutinized as carefully as the drawer's.
The bank establishes lines, or limits of credit, for the various parties from whom it takes items. These limits are recorded in the obligors book. This book is so kept that it shows at a glance the approximate amount discounted and still pending for account of the various customers. The clerk in charge of this book, when offerings are referred to him, marks each letter with the amount of the line of credit, if any has been fixed, and the amount running for the account of the firm under consideration. The purpose of the book is merely to give an approximate idea as to the contingent liability of the drawer— approximate, because in the absence of a cable to the contrary, it is assumed that all items are paid upon the approximate maturity date calculated in the obligors books. If it be necessary to as certain the exact contingent liability, it is determined by checking the items in the obligors books against the bills remitted ledgers of the foreign bookkeepers.
After noting the credit information on the letters, they are referred to the officers for approval. If the line of credit is exhausted, the offering must be declined or the line exceeded. If documents accompany the draft, covering non-perishable, staple, marketable merchandise, fully insured, the officers may decide to take the risk of exceeding the line. Other reasons may influence their decision, but normally items in excess of the line are turned down.
The Discount Rate The offering having been approved, the department head marks next to each item the rate of discount. These rates are based on the following factors : I. Interest for the length of time the bank may expect to be out of funds.
2. The bank's regular commission charge.
3. The correspondent's charges.
4. The bill stamps.
The bank adopts two general rates of interest, one for com mercial houses and one for banks and bankers, say 6 per cent and 5 1/2 per cent respectively; these rates are, however, subject to change and exceptions. Commission charges are sometimes
waived, usually when the bank remits to a branch or subsidiary. Bill stamps are required in most countries.
To illustrate how the discount rates are worked out concretely, assume a 9o-day bill drawn on a place where all the above charges are made: In the case of some customers, and if it is difficult to estimate one or more of the elements considered in determining a definite rate, the bills are discounted upon a basis of "subject to adjust ment." This phrase means that the bank advances to the cus tomer at once 8o or 90 per cent of the face amount and credits the balance to Funds Retained account. Upon receipt of the advice of payment, the exact charges are deducted from the Funds Re tained account and the balance is returned to the customer. Another way of handling the transaction is to advance the face amount of the discounted bill and upon receipt of the advice of payment send the customer a debit memorandum for the exact charges.
The rates on all items drawn in foreign currency are secured from the traders.
After the rates applicable to the purchases have been noted upon the letters, they are passed on to the payment clerk.
Method of Payment for Items Purchased The clerk in charge of payments makes a duplicate record of the transaction as follows (using a typical transaction): The duplicate record is used as a charge ticket for the account against which the item must stand until some advice is received concerning it from the correspondent. The item illustrated, for instance, would be charged to Bills Discounted, Bills Remitted Foreign, Buenos Aires, $2,000, the bill being charged at its face amount rather than at the amount of the proceeds.
If the customer does not have an account with the domestic division of the bank, the payment clerk prepares two credit tickets, the one crediting Cashier's Check account with the pro ceeds and the other crediting Discount account with the discount. VVhen the item is drawn in foreign currency and the bank's profit is reflected in the rate of exchange, or when the face amount of the item is advanced to the customer and a debit memorandum is put through later for the charges, only one credit ticket need be used crediting the proceeds to the customer.