Self liquidating (real bills doctrine) theory is a traditional and conservative banking theory. The main theme of this theory is that the earning asset of a bank should be limited to short-term self liquidating productive loans that include self liquidating commercial paper or short term loan intended to provide the current working capital, which in itself is of a self liquidating nature. The advantage of the ‘self-liquidating theory’ of commercial bank asset is mainly derived from the fact that such loans are considered to liquidate themselves automatically out of the sale of goods covered by such a transaction.
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