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Bill Discounting

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.

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Bill Discounting

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  1. Bill Discounting - A fund/asset based financial service

  2. 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.

  3. How B/E is to be created ?

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

  5. 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.

  6. Types of Bills • Demand Bill : Payable immediately • Usance Bill : Time bill • Documentary Bill : Accompanied by documents • Clean Bill : Not accompanied by any documents

  7. Advantages : To banks • Safety of Funds : Bearing signatures of two parties • 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

  8. 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 : • Credit worthiness of drawer (client) • Credit worthiness of drawee and dishonour if any • Nature of Customer’s industry.

  9. 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

  10. 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.

  11. How to deal in case of Default ? • Cycle of Liabilities in bill discounting transaction : • 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. Drawee Drawer Bill Discounting Agencies

  12. Loopholes/ Grey Areas • Who are the prime users of Bill Discounting facility in India and which are concerns? • Kite Flying : The practice of discounting accommodation bills are known as kite flying. • Supply Bills : B/E drawn by Suppliers/ Contractors to Government. It depress the level of cash flow in the bill market.

  13. 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.

  14. 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

  15. Salient Features of Bill Market Scheme • Eligible Institutions • Eligibility of Bills • Procedure for Rediscounting • Other Additions/developments in this scheme

  16. Eligible Institutions : • Licensed scheduled banks and those which don’t require license. • Above scheduled banks are eligible to rediscount bills of exchange with RBI.

  17. 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 ?

  18. Procedure for Rediscounting : • At maturity RBI gives back re-discounted bills to banks against the payment. • Maturity period less than 30 dayscan not be re-discounted with RBI.

  19. 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.)

  20. 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

  21. 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.

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