Bill Discounting

By : Gaurang Badheka
FSM, Sem - 3

What is Bill of Exchange

As per Negotiable Instrument Act, 1881 a
Bill of Exchange is an instrument in writing
containing an unconditional order, signed
by the maker, directing a certain person to
pay certain sum of money only to, or to the
order of, a certain person, of to the bearer
of that instrument.

Features of B/E
A bill of exchange is an instrument in writing.
It must be signed by the maker or drawer.
Unsigned document will not be legally valid.
It contains an unconditional order. There is no
condition attached to it.
The order must be to pay money and money
only.
The sum payable must be specific.
The money must be payable to a definite
person or to his order or to the bearer.

Various types of B/E

1. Demand Bill
2. Usance Bill
3. Documentary Bill
> Documents against Acceptance
> Documents against Payment
4. Clean Bill
5. Inland Bill
6. Foreign Bill
7. Accommodation Bill

Bill Discounting
When a seller ( drawer ) deposits genuine
commercial bills and obtain finance from a
bank or financial institution, it is known as
Bill Discounting.

Advantages to investor
1.
2.
3.
4.

Short term finance

Cheaper form of finance
Better fund management
Outside the purview of sec. 370 of
Companies Act, 1956
5. Rate of discount are quite attractive
6. Flexibility in terms of quantum and
duration of the investment.

Advantages to banker
1.
2.
3.
4.
5.

Safety of fund
Certainty of payment
Profitability
Solve inter-bank liquidity problem
Discount rate and effective rate of
interest.

Difference between factoring

and bills discounting
Bill Discounting

Factoring

Individual transaction
Each bill is to be
individually accepted by
the buyer
Stamp duty is applicable

Whole turnover basis

A one time arrangement
is made

Detailed documentation
is required.

In certain case, stamp

duty is not applicable
No such documentation
is needed.

Difference between factoring

and bills discounting
Bill Discounting
Original documents like
bill of exchange, LR,
RR, bill of lading, needs
to be submitted
Charges are up front
Pure finance activity
With recourse

Factoring
On copy of invoice is to
be submitted

No upfront charges
Other services are also
provided
With / without recourse

Difference between factoring

and bills discounting
Bill Discounting

Factoring

The drawee or the

acceptor of the bills is in
full knowledge of the
banks charge on the
receivables
Discounted bill can be
rediscounted

The buyer may not be

aware of such
assignment as it can be
undisclosed

No such provision in
factoring

PRECAUTIONS BY BANKER
1.
2.
3.
4.
5.
6.
7.

Credit standing
Complete bills
Genuine trade bills
Proper documentation
Credit appraisal
Safeguards on bills
Goods in the bills