BILLS DISCOUNTING

Prof. Sarbesh Mishra, Finance Area.

Bills of E chan!e

The bill of exchange (B/E) is used for financing a transaction in goods which means it is essentially a trade related instrument. According to Negotiable Instruments Act !""!# $The bills of exchange is an instrument is writing containing an unconditional order signed by the ma%er directing a certain &erson to &ay a certain sum of money only to or to the order of a certain &erson or to the bearer of that instrument'.

T"#es of Bills
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(emand Bill ) *ayable immediately on &resentment to em&loyee. ,sance Bill ) Time &eriod recogni-ed for &ayment of bills. (ocumentary Bill ) These B/E are accom&anied by documents that confirm trade has ta%en &lace. 0lean Bills ) These Bills are not accom&anied by any documents. Interest rate charged is higher than documentary bill.

Crea$ion of B%E

Two &arties i.e. seller sells goods or merchandise to a buyer. 1eller would li%e to be &aid immediately but buyer would li%e to &ay after sometime. 1eller draws a B/E of a gi2en maturity on the buyer. 1eller (0reditor) becomes drawer of the bill and buyer ((ebtor) becomes drawee of the bill. 1eller sends the bill to buyer for his acce&tance. Acce&tor may be buyer himself or third &arty.

Disco&n$in! of B%E
3older of an acce&ted B/E has two o&tions +. 3old on to B/E till maturity and then ta%e the &ayment from the buyer. .. (iscount the B/E with discounting agency. The act of handing o2er an endorsed B/E for ready money is called discounting the B/E. The margin between the ready money &aid and face 2alue of the bill is called the discount

Con$'(.
The maturity of a B/E is defined as the date on which &ayment falls due. Normal maturity &eriods are .4 54 64 or !+4 days. Bills maturing within 64 days are most &o&ular. (iscounting agencies are ban%s NB70 com&any high net worth indi2iduals etc.

A')an$a!es $o in)es$ors
1hort8term source of finance. 1ince it is not lending no tax at source is deducted while ma%ing the &ayment charges which are 2ery con2enient. 9ates of discount are better than those a2ailable on I0(s. 7lexibility not only in the :uantum of in2estments but also the duration of in2estments.

A')an$a!es $o Ban*s

1afety 7unds ) B/E is a negotiable instrument bearing the signature of two &arties considered good for the amount of bill so he can enforce his claim easily. 0ertainty of *ayment ) A B/E is a self li:uidating asset with the ban%er %nowing in ad2ance the date of its maturity. *rofitability ) The discount on bill is front ended the yield is much higher than in the other loans and ad2ances where interest &aid :uarterly or half yearly.

Con$'(.

E2ens out inter8ban% li:uidity &roblem ) The de2elo&ment of healthy &arallel bill discounting mar%et would ha2e stabili-ed the 2iolent fluctuations in the call money mar%et as ban%s could buy and sell bills to e2en out their li:uidity mismatches.