BILLS DISCOUNTING

CHAPTER 7 SUB – MANAGEMENT FINANCIAL SERVICES

SUNIL PANCHAL JITEN PATEL ASHISH SHAH JAY SHAH

BILL OF EXCHANGE

• Meaning :It is an instrument in writing containing an unconditional order to pay a certain

amount of money to a specified person.

• How to create B/E

• Discounting of a B/EThe seller ,who is the holder of an accepted B/E has two options..I. Hold on to the B/E till maturity and then take the payment from the

buyer.II. Discount the B/E with a discounting agency.

TYPES OF BILLS

1. Demand bill

2. Usance bill

3. Documentary bills

I. D/A billsII. D/P bills

4. Clean bills

ADVANTAGES

• To Investors:I. Short term sources of financeII. Better rate of discount III. Flexibility

• To Banks:I. Safety of fundsII. Certainty of payment III. Evens out Inter-bank liquidity problems

BILL MARKET SCHEMES

The Reserve Bank of india has constantly endeavoured to develop the commercial

bill market.several committees set-up to examine the system of bank financing and

money market has strongly recommended a gradual shift to bills finance and phase-

out of the cash credit system.

1.Dehejia committee,1969

2.Tandon committee,1974

3.Chore committee,1980

4.Vaghul committee,1985

The efforts made by the RBI in the direction of the development of full-fledge bill

market

Bill market scheme 1952

1. The scheme was announced under section 17(4)(c) of RBI Act which enables it

to make advances to scheduled bank against the security of issuance of

promissory notes or bills drawn on and payable in india and arising out of bona

fide commercial transaction bearing two or more good signature and maturing

within 90 days from the date of advances.

2. The scheduled banks were required to convert a portion of the demand

promissory notes into usance promissory notes maturing within 90 days to be

avail of refinance under the scheme.

3. The existing loan.cash credit or overdraft accounta were,therefore,required to be

split up into two parts

(A) one part was to remain covered by the demand promissory notes,in this

account withrawla or repayments were as usual being permitted.

(B) other part represent the minimum requirement of the borrower during the

next three months converted into usance promissory notes within 90 days.

4. Banks could lodge the usance promissory notes with RBI for advances as

eligible security for borrowing so as to replenish their loanable funds.

5. The amount advanced by the RBI was not to exceed the amount lent by the

scheduled banks to the respective borrowers

6. The scheduled bank applying for accommodation had to certify that the paper

presented by it as collateral arouse out of bona fide commmercial transactions and

that the party was creditworthy

7. As a further inducement to banks, the RBI agreed to bear half the cost of the

stamp duty incurred in converting demand bills into time bills.

8. Minimum limit for advances from the RBI is fixed at Rs 25 lakh and for

individual is not to be less than Rs 1 lakh.Subsequently minimum amounts were

reduced from Rs 25 to 10 lakh and again at Rs 5 lakh in 1967.and from Rs 1 lakh

to Rs 50000.

The scheme virtually ceased to function in 1970

Lack of specialised institutions for discharging the function of acceptance.

Paucity of usance bill both domestic and foreign

Traders found cash credit facility available from banks and avoided usance bills

Banks got refinance against declaration of export bills from RBI/EXIM bank

Lack of practice of discounting the bills with other banks having excess liquidity

Criteria for creditworthiness of the traders was not evolved to avoid risk of

defaults of redemption on maturity of the bills.

Bill market scheme 1970

The recommendations of the Dahejia committee,the RBI constituted a working

group (Narsimham study group) to evolve a scheme to enlarge the use of bills.

RBI was introduced this scheme with effect from November,1,1970 The scope of the scheme was enlarged

the number of participants was increased and the procedure was simplified over

the years.

Eligible institutions

All licensed scheduled banks and those which do not required a licence are

eligible to offer bills of exchange to RBI for rediscount.

Eligibility of bills

The eligibility of bills offered under the scheme to the RBI is determined by the

statutory provisions embodied insection 17(2)(a) of the RBI Act which authorise

the purchase,sale and rediscount of bills of exchange and promissory notes drawn

on and payable in india bearing two or more good signatures,one is scheduled

bank or state co-operative bank and maturing:

1. In case of bills of exchange and promissory notes arising out of any such

transaction relating to the export of goods from india within 180 days

2.In any other case,within 90 days from the date of purchasse or rediscount

exclusive of days of grace.

3.The bill arising out of genuine sale of goods and should normally have a maturity

not more than 90 days.

4. Bill of exchange arising out of the sale of commodities covered by the selective

credit control directives of the RBI have been excluded from the scope of the

scheme to facilitate the selective credit control

5.The following types of bills are acceptable to RBI for rediscount:

Bills drawn on and accepted by the buyer’s bank

Bills drawn on buyer and his banker jointly and accepted by them jointly

Bills drawn on and accepted by the buyer under an irrevocable letter of credit and

certified by the buyer’s bank

Bills drawn and accepted in the prescribed manner and discounted by a bank at

the instance of the drawee.

Where the buyer’s bank is not a licensed scheduled bank,the bill should additionally

bear signature of a licensed scheduled bank.

PROCEDURE FOR REDISCOUNTING

• Banks are required to apply to the RBI - prescribed form - giving estimated requirements.

• RBI presents for payment bills of exchange rediscounted by it and such bills have to be taken delivery of by the rediscounting banks against payment, not less than 3 working days before the dates of maturity if bills concerned.

• If bills are retired before the dates, pro-rata refund of discount is allowed by RBI

• Bills already rediscounted with RBI may be lodged/deposited with it for rediscounting purpose.

• The unexpired period of the usance of bills so offered should not be less than 30 days & the bills should not bear the endorsement of discounting bank in favor of a party other than RBI.

BANKS TO HOLD BILLS REDISCOUNTED

• Bill rediscounting scheme over years has been restricted and presently this facility is operated by RBI on a discretionary basis.

• Several committees measures to revitalise bill market scheme as initiated by RBI to promote bill financing:

ceiling on proportion of receivable (75%) eligible for financing under cash credit system ad hoc limits period not exceeding 3 months – 10% of existing bill limit subject to ceiling of Rs.1 crore setting up DFHI (Discount & Finance House Of India) to buy/sell/discount short term bill Reduction in discount rate on usance bills

• The rediscounting facility from RBI has slowed, so banks encouraged to rediscount bills with one another as well as with approved financial institutions like LIC, GIC, UTI, ICICI, and mutual funds.

CREDIT ASSESSMENT

• Banks and NBFCs undertake a detailed credit appraisal before providing BD facility.

• Credit limits fixed for the parties, for discounting the bills.

• Limits renewed on the basis of : Turnover of inventory, Credit worthiness of the drawer (Client), Credit worthiness and willingness to pay of the drawee, Nature of customer’s industry.

• Appraisal done through several means: Careful Scrutiny of customer’s operations- financial statement analysis Indian Banks Association Bulletins, which indicate the names of unsatisfactory drawees and their default rates. Substantial credit intelligence database – blacklist the default client

• In case of an existing client, assessed that there is no overdue bill pending and In case of a new client creditworthiness of party made from banker, market and other finance companies.

CREDIT ASSESSMENT (Cont..)

• If report is satisfactory, limit is fixed for party.

• For proper control, there should be proper follow up of bills due and limits fixed for clients and should be reviewed at appropriate interval of time.

• Special attention while reviewing bills discounting limits: Earlier sanctioned limits fully utilized by client Paid on maturity date For unpaid bills, funds paid by the drawer.

• Documents collected while approaching for the Finance Company– Invoice, Delivery challans, Receipt of goods acknowledged by buyer, Promissory note, Truck receipt/railway receipt.

• Limit Fixing for bill discounting requires proper analysis of B/S, and P&L and the ratios like Liquidity, Profitability, and Interest coverage

PRECAUTIONS THAT FINANCE COMPANIES TAKE

1. The bills are not accommodation bills but are genuine trade bills.

2. Bills are drawn on the places where the finance comp. is operating or has a branch off. as it would facilitate contact with drawee in case of need.

3. The goods covered by the documents are those in which the party deals.

4. The amount of the bill is in proportion with the volume of business turnover of the party.

5. Bills are drawn on the place where the goods have been consigned.

6. The credit report on the drawee is satisfactory.

7. Details of goods mentioned in invoice and transport receipt must be same.

8. The goods are not consigned directly to the buyer.

9. The goods are properly insured.

CONTINUE…….

10. The usance (time) bill is properly stamped.

11. The goods whose price fluctuates too much are not covered in bills offered for discount.

12. The goods covered under the bill are not of perishable nature.

13. The bills are not stale.

14. The truck receipt is in the form of prescribed by the Indian Banks Association.

15. Bills are drawn in favour of the finance company & have been accepted by the drawee.

Dealing with Default : The drawee is liable to the drawer, and the drawer to the discounting agency.

In case of default discounting agency can resort to nothing and express objection as per negotiable instrument act. But in reality the claim to a court is very expensive and lengthy. So mainly the combination of negotiation and compromise is used. Worst is the some dues they have to write off.

Grey Areas: There are certain features of Indian industry which delay/stops the growth of a bill discounting market.

Most of the customers approach the bank/NBFCs for bill discounting are mostly the small scale industry.

Supply bills: B/E drawn by suppliers/contractors on govt. depart. Are called supply bills. These are not accepted by the government.

• Reduced Supply: Several corp. houses & business groups don’t accept B/E drawn on them. Accepting such bills is seem to be damaging to their pride. This attitude discourage the culture and reduce the supply of discounting the bills.

• Stamps Duties: No stamp duties are levied on LC backed bills upto 90 days. It resulted in lop sided growth.

• PRESENT POSITION OF BILLS DISCOUNT:

• Bill-Brokers arise out of the business transaction for buyers & sellers. At times they used to take the bills on their own account, using own funds or taking short term accommodation from banks working as acceptance.

• They had been handling business approximately Rs. 5000 crore annually.

• Banks as well as bill brokers were misusing the bill rediscounting facility.

• Banks have been providing bill finance outside the consortium without informing the consortium bankers.

• They have been drawing bills on companies and discounted such bills to avail of rediscount facilities.

• Bill finance was provided to dealers of large mfg companies without proper need of the credit.

• Rediscounting of bills by finance companies with banks was done at much lower rate of interest.

• No records regarding bill discounting ever maintain by the banks.

THANK YOU