what is bill of discounting
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7/24/2019 What is Bill of Discounting
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CRITICAL EVALUATION OF BILL OF DISCOUNTING IN INDIA
What is bill of discountin!
Bill Discounting is a fund/asset based nancial service. A bill discounting is a
process that involves eectively selling a bill to a bank or similar entity for an
amount that is slightly less than the par value and before the maturity date
associated with the bills of exchange. he debtor tenders payment to the new
owner of discounted bill in the full amount agreed upon originally. his approach
allow the issuer of the bill to receive cash before the actual due date associated
with the bill! while also allowing the buyer to make a modest prot on the cash
advance extended to the bill"s originator.
echnically Bill discounting is dened as the selling of bill to bill discounting
company before the due date of payment at a value which is less than the invoice
amount. he dierence between the bill amount and the amount paid is the fee of
the bill discounting company. he fee will depend upon the period left beforepayment date and the perceive risk.
#$A%&'#( )ne of the easiest way to understand how bill discounting work is to
consider a bill of exchange issued by AB* company to its client! $+, company. AB*
company decides to cash in the outstanding bill in order to make use of the revenue
now rather than later. o this end AB* approaches a bank with an oer to sell the
bill for -) of the par value. he bank looks over the transaction and decide the
deal is viable. pon approval! AB* receives -) of the par value of the bill and
instructs $+, company to remit payment to the bank. 0nce the bank receives full
payment from $+,! the deal is considered complete. 1www.wisegeek.com2
CONCE"T
he bill under bill discounting are legally the 3bill of exchange" A bill of exchange is a
negotiable instrument which is negotiable mere by endorsing the name
Acco#din to th$ Indian N$otiabl$ Inst#u%$nts Act& '((') 4he bill of
exchange is an instrument in writing containing an unconditional order! signed by
the maker! directing a certain person to pay a certain sum of money only to! or to
the order of! a certain person! or to the bearer of the instrument.5
he bill of exchange 1B/#2 is used for nancing a transaction in goods which means
that it is essentially a trade( related instrument.
Wh* Bill Discountin !
he seller who is the holder of a accepted B/# has two option6
7. 8old on the B/# till maturity and then take the payment from buyer.9. Discount the B/# with Discounting Agency.
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he buyer and seller of goods have con:icting ob;ectives. he seller wishes to get
paid immediately and the buyer wants as long credit period as possible. Bill
discounting is the solution to the problem which creates win(win situation. he seller
gets his money almost instantly on payment of a small change and is able to satisfy
its customer with credit period. he invoice discounting is an easy way of getting
nance.
BILL DISCOUNTING "ROCEDURE)
he process of bill discounting is simple and logical.
• he seller sells the goods on credit and raises invoice on the buyer.
• he buyer accepts the invoice. By accepting! the buyer acknowledges to pay
on the due date.
• <eller approaches the nancing company to discount it.
• he nancing company assures itself of the legitimacy of the bill and
creditworthiness of the buyer.• he nancing company avails the fund of the seller after deducting
appropriate margin! discount and fee as per the norms.
• <eller gets the funds and uses it for further business.
• 0m the date of payment! the nancial intermediary or the seller collects the
money from the buyer. 3who will collect the money" depends on the
agreement between the seller and nancing company. 1http6//
www.enancemanagement.com/working(capital(nancing/bill(discounting 2
T+"ES OF BILLS
D#%A=D B>''6 &ayable immediately 4at sight5 or 4on presentment 4 to the drawee.
Bill on which no 4due date5 is specied is also termed as a demand bill.
<A=*# B>'6 1time bill2 ? bill of exchange drawn on a term governed by the usage
in that rade. sance refers to the time period recogni@ed by custom or usage for
payment of bills.
D0*%#=A+ B>''<6 B/#"s that are accompanied by documents that conrm that a
trade has taken place. Documents include the invoice and other documents of title
such as railways receipts! lorry receipts and bills of lading.
urther classied as6
i. Documents against acceptance 1D/A2 bills( documentary
evidence accompanying B/# is deliverable against
acceptance by drawee.ii. Documents against payment 1D/&2 Bills( in case a bill is a
4document against payment5 bill and has been accepted by
the drawee! documents of tittle will be held by bank till
maturity of B/#.
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*'#A= B>''<6 not accompanied by any documents that show that a trade has taken
place. hus interest rate charged on such bills is higher than rate charged on
documentary bills. 1http6//eravandi.blogspot.com/bill(discounting2
ADVANTAGES) he advantages to bill discounting to investors and banks
and nancial companies are as follow6
0 >=C#<07. <hort term sources of nance9. Bill discounting being in the nature of transaction is outside the
purview of section E) of the >ndian companies act 7-FG! that restricts
the amount of loans that can be given by group companiesH. <ince it is not lending! no tax at source is deducted
I. ates of discounts are better than those available on >*D"sF. lexible! not only in the Juantum of investments but also in the
duration of investments.
0 BA=K<
7. <afety of funds6 the greatest security for a banker is that a B/# is
negotiable instrument bearing signatures of two parties consider
good for the amount of billH so he can conrm his *laim easily9. &rotability6 since the discount on a bill is front ? ended! the yield is
higher than other loans.. *ertainty of payment6 a B/# is a self( liJuidating asset with the
banker knowing in advance the date of its maturity.I. #vens out inter(bank liJuidity problems( the development of healthy
parallel bill discounting market would have stabili@ed the violent
:uctuations in the call money markets as bank could buy and sell bills
to even out their liJuidity mismatches. 1;ournal( management of
nancial services2
DISADVANTAGES OF BILL DISCOUNTING
>t can be expensive form of nancing compared to other modes of nancingsuch as bank overdraft etc.
>t is not successful due to various misuses by nancing brokers! banks etc.
<uppose there are two sister companies A And B! A draws bill on B without any
;udicious transaction. B accepts it and A discounts it with the bank and utili@es the
credit illegitimately. >f the intentions are bad! A And B may default on payment and
the banks will have to suer.
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T+"ES OF BILL DISCOUNTING)
Bills discounting >s of two types
7. &*8A<# B>'' D><*0=>=L( investor discounting the purchase bill of the
company and pays the company! who in turn pay their suppliers. >nvestor
gets his money back from the company at the end of discounting period
9. <A'#< B>'' D><*0=>=L6 >nvestor discounts the sales bill of the company
and pays directly to the company. he investor gets his return from the
company at the end of the discounting period.
Usuall*& th$ ban, -ant so%$ conditions to b$ ful.ll$d to b$ abl$ to
discount a bill)
A bill must be a usance bill
>t must have been accepted and bear at least two good signatures 1eg. 0f
reputable individual! companies or banks etc.2
where a usance bill is drawn at a xed period after sight ! the bill must be accepted
to establish the maturity.
he advising or conrming bank will hide the reimbursement instrument from the
beneciary so that his bank must present the documents to the nominated bank for
negotiation in order to obtain payment under the D* terms .
Bills which are nanced by the receiving branch! whether drawn under a D* or not !
are treated as bills receivable by both the remitting branch and the receiving
branches. 1http6//hsbc.co.in/corpotate(banking/bill(discounting2
DISCOUNT RATES 6 the rate depend upon following factors
• 8# B0K#( his relation with the company and the investor do make a
dierence of a couple of percentage point in discounting rates.
• '>M>D>+( liJuidity crunch in the market tends to hike up the rates even in
the best of the companies.
• C0'%#/ CA'# 0 D><*0=>=L( when the volume of discounting done by
investor is high! he is looking at security more then returns. he company on
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its part is looking at savings by way of reduced legal paper work and a higher
amount of dedicated funds.
• #M#=*+( regular bill discounter may get upto 7 to 7.F points higher
interest rates than a new investor. >nvestor trying out with a new company
and will agree to a lesser rate to ensure safety. 1;ournal on management on
nancial services2
BILL DISCOUNTING DEALING WIT/ DEFAULTS
he drawee is liable to the drawer! and the drawer to the discounting agency.
8owever the bank / =B* looks mainly to its customer1 drawer or drawee2 for
recovery of its dues. >n case of default! the discounting agency can resort to nothing
and protesting as laid down by the =egotiable >nstrument Act. >n reality! however!
since litigation is both cumbersome and expensive! a combination of negotiation
and compromise is used. At worst! some dues may be written o.
=B*"s generally build in a large number of safeguards to guard against default.
Banks generally discount '*( baked bills which are default proof.
Lrey areas6 these are certain features of the >ndian industry which have impeded
the growth of a healthy bills discounting market 1BD2
&articipants6 most of the customers approaching banks for BD are small scale
industry units. or such enterprises! it is very diNcult to undertake proper credit
assessment.
Kite lying6 the practice of discounting accommodation bills is known as kite :ying.Ohen one person draws a bill on other without there being any underlying
movement of goods and other accepts it.
<upply bills6 B/# drawn by suppliers contractors on Lovernment departments are
called supply bills. hese are not accepted by the government . however!
contactors are able to discount them with nationali@ed banks. his practice
depresses the level of cash in the bill market
educed supply6 several corporate houses and business groups do not accept B/#
drawn on them. Accepting such bills is seen to be damaging to their pride. <uch
attitude reduce the supply of bills and discourage the culture of drawing anddiscounting bills.
<tamp Duties6 no stamp duties are levied on letter of credit backed bills up to -)
days. his has resulted in a lop(sided growth in the bills market with practically no
bills being drawn for a period exceeding -) days. he market therefore! lacks depth.
1http6//www.citeman.com/GG99(bill(discounting(dealing(with(defaults.html2
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