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 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
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 Customer’s 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.
Reduced Supply
3.

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
Eligible Institutions :
1.

Licensed scheduled banks and those which don’t
require license.

Above scheduled banks are eligible to rediscount
bills of exchange with RBI.
Eligibility of Bills
2.

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 ?
Procedure for Rediscounting :
3.

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.
Additions/Developments in this scheme:
4.

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.