Credit plays an important role in organising production, in the modern industrial economy. Credit is the transfer of wealth from one person to another. It is a device through which transactions can be effected much more conveniently and economically. Credit transactions are organised mostly through banks either in the form of cash or credit. Credit means the institutes confidence in the willingness and ability of the person to repay the amount of credit given.
Credit transactions are generally made through the following instruments:

·        Promissory Notes.
·        Bills of Exchange.
·        Cheques.
·        Drafts.
·        Hundies.
·        Letters of credit.


Promissory Notes

It is the simplest form of the credit instruments. It contains the buyer’s promise to pay the seller a certain amount of money for value received. The payment is to be made after a specific period of time. Such a document may be used for personal or commercial transactions.

Bills of Exchange

A bill of exchange is an order written by sellers of goods asking buyers to pay a certain sum of money to the bearer or to a third individual, on account of the value of goods sold. The seller is generally known as the drawer of a bill and the buyer is known as the drawee. A bill of exchange is of great importance in financing trade, specially foreign trade.

Cheque

The most important credit instrument is the cheque. A cheque is an order by the depositer to a bank asking it to pay to an individual or the bearer of the cheque certain sum of money from his account. Cheques are written on a prescribed form supplied by the bank. Every cheque bears a number. Mere issue of a cheque is not regarded as a completed transaction. The transaction is said to be completed only when the cheque is presented to the bank on which it is drawn and cash is received in exchange.

Draft

A draft is a cheque drawn by one bank upon another. This is the cheapest means of transferring money from one place to another with the help of banks. It can be either a bearer, order or crossed draft.

Hundi

In India, Bills of Exchange have been in use from very early. They are known as ‘Hundies’. A hundi is an internal bill of exchange. It helps in financing internal trade.

Letter of Credit

A letter of credit is also known as a credit note and it is used particularly in foreign trade dealings.

Bond

It is the alternative name for a stock or security. Many Government stocks are known as bonds, for example, the various issues of Saving Bonds, Defence Bonds, Premium Bonds, Gold Bonds etc. The issue of bonds is a method adopted by Government Local authorities and other institutes for borrowing. Government bonds usually get redeemed at some future date.


Debentures giving the holder the right within a specified period to convert them into ordinary shares of the company on specified terms are said to carry conversion right. When an organisation is not in a position to return the amount of debentures into ordinary shares such bonds are called as Convertible Bonds.