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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.
• Discounting of a B/E
The 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 bills
II. D/P bills
4. Clean bills
ADVANTAGES
• To Investors:
I. Short term sources of finance
II. Better rate of discount
III. Flexibility
• To Banks:
I. Safety of funds
II. 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
• 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.
• Credit limits fixed for the parties, for discounting the bills.
• 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.
• 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.
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.
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.
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.
• 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.