Banker’s Acceptance (BA)

Definition

The banker’s acceptance, also known as bill of exchange, is a bank draft that requires a bank to pay a holder of an instrument a stated amount on a specified date. This usually occurs with commercial banks, and the specified date is normally 90 days from the date of issue with a few exceptions of 180 days. In most cases, the banker’s acceptance acts as a post-dated check and it is issued by a bank as a guarantee of payment rather than an account holder. It can also be used as a short-term debt instrument that can be traded at a discount to face value in money markets just like the US Treasury bill.

Understanding Banker’s Acceptance

Banker’s acceptances are usually issued at discounts and require full one-time payment when due. The difference between the value when issued and value at maturity is the interest. The amount paid may be less by the amount of interest that will be earned at maturity if the banker’s acceptance is presented for payment at an early date. Many times, the banker’s acceptance is used for international trades. However, in a few cases, it may be required for trades done within the same country.

When dealing with international trades, a banker’s acceptance is being issued as guarantee of payment. For example, if Tom, an importer wants to import a product from China (foreign country) into the US. It would be required of him to request a letter of credit from his bank and send it to the exporter which would stand as a guarantee of payment for a stated amount and time. The exporter, in turn, would submit copies of the shipping documents and the importer’s letter of credit to his domestic bank, which would pay for the letter of credit at a discount. The exporter’s domestic bank would then send a time draft to the importer’s (Tom’s) bank after stamping it as accepted, thereby, converting the time draft into a banker’s acceptance.