Bill Discounting

- A fund/asset based financial service

Concept Bill of Exchange

Bill

of exchange, is an instrument in writing

which is an unconditional order to pay a
certain amount of money to a specified
person.

How B/E is to be created ?

Discounting of B/E
The seller who is the holder of a accepted
B/E has two options :

1.
2.

Hold on the B/E till maturity and then take the

payment from buyer.
Discount the B/E with discounting agency.

Note : However the option (2) is much more

attractive as seller gets ready cash

Discount :

Seller can take the accepted B/E to a discounting

agency and obtain ready cash.

The act of giving accepted B/E for ready money is

call discounting the B/E.

The difference between ready money paid and

the face value of the bill is called the discount.

Types of Bills
1.

Demand Bill : Payable immediately

2.

Usance Bill : Time bill

3.

Documentary Bill : Accompanied by documents

4.

Clean Bill : Not accompanied by any documents

Advantages : To banks
Safety

parties

of Funds : Bearing signatures of two

Profitability

: Discount is front-ended, so as
yield is much higher than loans

Even

out Inter-bank Liquidity Problems :

Stabilized the fluctuations in the call money

market

Processing - Credit Assessment

Discounting agencies will do the appraisal
of the customer.
Credit limit will fix up by discounting
agencies
The credit limits are based on following
considerations :

2.

Credit worthiness of drawer (client)

Credit worthiness of drawee and dishonour if any

3.

Nature of Customers industry.

1.

 Once

discounting agencies, gives approval

for bill discounting, following documents are
submitted:

Invoice
Challan
Receipt of goods (acknowledge by buyer)
Promissory Note
Railway Receipt/ Truck Receipt
Post dated cheque for interest amount

Precautions By Banks, NBFCs

Goods

covered by documents are those in

which the company is dealing
The amount of bill should match with
business turnover of the company.
Where discounting agencies is operating or
have a branch office.
The credit report on the drawee is satisfactory

The goods covered under the bill are not of

perishable in nature.

How to deal in case of Default ?

Cycle of Liabilities in bill discounting transaction :

Drawee

Drawer

Bill Discounting Agencies

In case of default, bill discounting agency can lodge

the complaint under Negotiable Instrument Act.

In real life, it is preferable to have negotiation and

compromise.

Loopholes/ Grey Areas

Who are the prime users of Bill Discounting facility

in India and which are concerns?

1.

Kite Flying : The practice of discounting

accommodation bills are known as kite flying.

2.

Supply Bills : B/E drawn by Suppliers/ Contractors

to Government. It depress the level of cash flow in
the bill market.

3.

Reduced Supply

Several corporate house do not accept B/E

drawn on them.

Accepting such bills is somewhat damaging their

prestige.

Such attitude discourage the culture of using

discounting bills.

Bill Market Scheme, 1970

Recommendation

made by Dahejia

Committee.

New bill market scheme was introduced to

facilitate the re-discounting of eligible B/E by
banks to RBI

Salient Features of Bill Market

Scheme
1.
2.
3.
4.

Eligible Institutions
Eligibility of Bills
Procedure for Rediscounting
Other Additions/developments in this
scheme

1.

Eligible Institutions :

Licensed scheduled banks and those which dont

require license.

Above scheduled banks are eligible to rediscount

bills of exchange with RBI.

2.

Eligibility of Bills

Drawn or payable in India

Bearing two or more signatures, one of which

should be of bank and B/E maturing :

Export of goods from India, within 180 days

Any other case, 90 days from the purchase
The scheme is eligible for only genuine trade bills
arising out of genuine sale of goods & if 90-120 days ?

3.

Procedure for Rediscounting :

At maturity RBI gives back re-discounted bills to

banks against the payment.

Maturity period less than 30 days can not be rediscounted with RBI.

4.

Additions/Developments in this scheme:

Setting up Discount and Finance House of India

(DFHI)

Remission of Stamp duty

The re-discounting facility from RBI has

gradually slowed down and encouraged
rediscount with one another bank and approved
financial institutions (e.g. LIC, GIC, ICICI etc.)

Present Scenario
To

stop misuse RBI has issued guidelines

which are as follows :

Bill covering purchase of raw material or sale of

goods should be discounted by banks.
Kite Flying/Accommodated bills should never be
accepted.
No fund facility should be provided by banks
outside the consortium arrangement

The banks should not re-discount the bills earlier

discounted by banks with NBFCs.

As a result, there is drastic decline in bill

discounting transaction. Presently, the
monthly turnover on an average is Rs.100
crore and Rs. 800-900 crore per year. The ban
on re-discounting also resulted in decline of
business of NBFCs.