Collection of Bills

Overview
Objectives
• Explain bills of exchange and the documents required
in trade transactions
• Discuss OBC and IBC and the processes involved in
both
• Identify the types of bills and explain their features
What is Bill of Exchange?
• Bill in banking practice refers to “Bill of exchange”.
• Bill of exchange is a written instruction issued by the
seller (drawer) to the buyer (drawee) to pay a certain sum
of money to the person named in the document (payee).
• The creditor will give the bill to the payee to claim the
money from the debtor.
• The payee will “present” the bill to the debtor to claim
the money.
• A cheque is indeed a bill of exchange, the only difference
is that in the case of a cheque the drawee is always a
bank/post office.
Documents-Trade Transactions
• Invoice
• Transport Document (Railway Receipt (RR), Lorry
Receipt (LR), Airway Bill)
• Bill of Exchange
• Any other document the seller has to send to the
buyer as per mutual agreement (like certificate of
inspection, insurance policy, packing list etc.)
What is Outward Bill for Collection (OBC)?
• A bill submitted by a customer and sent out for
collection to another branch or bank at the place of
the buyer is called OBC.
• It is also known as Outward Documentary Bill for
Collection (ODBC) as documents of title to goods are
involved.
Process Involved in OBC
• Seller dispatches the consignment by rail, road or air
to the place of buyer in his own name.
• Seller gives the bank, documents like covering letter
(with instructions), bills of exchange, RR or LR in
favor of seller and endorsed to bank, invoice signed
by him etc.
• Banks should ensure that the instructions of the
seller are clear and the bill as well as the transport
document are in bank’s favor.
• If it is sent to another bank for collection, the bank
should endorse the bill and the transport document.
What is Inward Bill for Collection (IBC)?
• Inward Bill for collection is a bill received from
another bank or branch and drawn on a customer for
collection.
• It is also called as Inward Documentary Bill for
Collection (IDBC).
Process Involved in IBC
• Bank should ensure that all the documents stated in
the bill schedule have been received and the
instructions in the schedule are clear.
• A covering letter is sent to the buyer (drawee) giving
full details of the bill and asking the buyer to make
payment and take delivery of the documents as
instructed by the seller.
• On the buyer making payment, the transport
document will be endorsed in his favor.
• The proceeds should be remitted to the seller’s bank
as instructed by them.
Types of Bills
• Demand Bills
• Usance Bills
• Documentary Bills
• Clean Bills
• Inland Bills
• Foreign Bills
• Trade Bills
• Accommodation Bills
Demand and Usance Bills
Demand Bills:
• The transport documents will be delivered to the drawee or
buyer only on his making payment of bill.
Usance Bill:
• Transport documents will be handed over to the buyer
after he accepts the bill.
• Buyer’s bank should deliver the documents against
acceptance. On default they may also have to protest the
bill.
• Usance bills have to be stamped as per Stamp Act.
• The value of stamp to be affixed depends upon the amount
and period of usance.
Differences between Demand & Usance Bills

Demand Bills Usance Bills

Bills purchased Bills discounted
Normally secured Unsecured as the
documents are
handed over to the
drawee on
acceptance
Documentary and Clean Bills
• Documentary Bills: Document of title to goods should
accompany the bill.
• Clean Bills : Document of title to goods need not
accompany the bill.

Example of clean bills:

Bills for collection of service charges like consultancy
charges or software development charges.
Inland and Foreign Bills
• Inland Bills: The bills should be drawn and payable in
India.
• Foreign Bills: The bills should be drawn by or drawn
on a party outside India.
Trade and Accommodation Bills
• Trade Bills: To facilitate settlement of genuine trade
transactions
• Accommodation Bills: Not supported by a trade
transaction

Note: Banks should be very careful in entertaining

accommodation bills, since two parties may collide by
drawing and accepting a bill to raise funds.
Summary
• Bill of exchange and the documents required in trade
transactions
• OBC and IBC and the processes involved in both
• Types of bills and their features