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Financial Services:

Financial Services A seminar on “Bill Financing” By Harsha.H 3 rd sem


INTRODUCTION Funds for working capital required by commerce and industry are mainly provided by banks through cash credits, Overdrafts and purchase/discounting of commercial bills. Bill finance is provided by banks. Bill market is a place where the bills accepted by bankers or Acceptance Houses are discounted.

Bill of Exchange: :

Bill of Exchange: Short term financial instrument and is widely used method of short term financing . Known as acceptance credit where one party accepts the liability of trade towards third party. Used as medium of financing the current trade and is not used for financing capital purposes. It is a fund based activity.

Definition of Bill of Exchange:

According to the Indian Negotiable Instruments Act, 1881 “ The Bill of Exchange or Trade Bill 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 the order of, a certain person, or to the bearer of that instrument .” Definition of Bill of Exchange

Creation of Bill Of Exchange::

Creation of Bill Of Exchange: Most of the sales will be on credit basis. Buyer purchases goods on terms and conditions that, he’ll pay for the purchases on some future date. The seller draws a bill of exchange of a given maturity on the buyer. Seller is Creditor & called as Drawer. Buyer is Debtor & called as Drawee . Buyer accepts the bill by signing on the Bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer.

Types of Bills: :

Types of Bills: Demand Bills Usance Bills Documentary Bills Document against Acceptance (D/A) Bills Documents against Payment (D/P) Bills Clean Bills Inland Bills Foreign Bills Accommodation Bills Supply Bills Hundis

Meaning of Bill Discounting:

Meaning of Bill Discounting When the seller obtains financial accommodation from a bank or financial institution , it is known as ‘ Bill discounting ’. The seller, instead of discounting the bill immediately, may choose to wait till the date of maturity. In the process, the seller may loose a little by way of discount charged by the discounting banker.

Feature of Bill Discounting::

Feature of Bill Discounting: Discount Charge Maturity Ready Finance

Advantages of Bill Discounting::

Advantages of Bill Discounting: Easy access Safety of funds Certainty of payments Profitability Smooth liquidity Ideal investment Facility of refinancing Relative stability of Prices.

Disadvantages of Bills Discounting::

Disadvantages of Bills Discounting: Absence of Bill Culture Absence of rediscounting among banks Stamp duty Absence of secondary market Difficulty in ascertaining genuine trade bills Limited foreign trade Absence of acceptance services Attitude of banks.

Reasons for Non-Development of Bill Market in India::

Reasons for Non-Development of Bill Market in India: Indian commercial banks have comparatively highly liquidity ratio. Therefore, they prefer to invest their funds in government securities to discounting of bills. Indian business houses generally sell goods either on credit or non consignment basis and obtain advances from commercial banks in the form of cash credits rather than financing the trade by bills of exchange.

Slide 12:

The commercial banks always prefer to obtain loans from RBI on the security of government bonds. They seldom re-discount bills with it. Re-discounting of bills by commercial banks is considered as a sign of weakness and, thus, the banks are unwilling to run this risk of being misunderstood. Moreover, as the power of the RBI to re-discount bills is limited, the facilities for re-discounting bills are almost absent.

Slide 13:

Lack of uniformity in drawing bills is another reason for the unpopularity of bills in India. The bills drawn in different parts of the country are not uniform and, therefore, the people doubt about the negotiability of the bill. This stands in the way of development of a bill market in India. High stamp duty also discourages the development of a bill market in India.


RBI INITIATIVE TO DEVELOP BILL MARKET: With effect from June 1974, the RBI has taken the innovative step of permitting scheduled commercial banks to rediscount genuine trade bills with other commercial banks, LIC, UTI, GIC, and ICICI. This has increased the number and types of institutions participating in the bill market in India.


BILL MARKET SCHEMES: The Reserve Bank of India (RBI) has constantly endeavored to develop the commercial bills market. Several committees set-up to examine the system of bank financing and money market Dehejia Committee, 1969, Tandon Committee, 1974, Chore Committee, 1980 and Waghul Committee, 1985. This section briefly outlines the efforts made by the RBI in the direction of the development of a full-fledged bill market.

Bill Market Scheme, 1970::

Bill Market Scheme, 1970: In pursuance of the recommendations of the Dehejia Committee, the RBI constituted a working group ( Narasimham Study Group) to evolve a scheme to enlarge the use of bills.

Slide 17:

Based on the scheme suggested by the study group, the RBI introduced with effect from 1 st November 1970, the new bill market scheme in order to facilitate the re-discounting of eligible bills of exchange by banks with it. . To popularise the use of bills, the scope of the scheme was enlarged, the number of participants was increased, and the procedure was simplified over the years.

The salient features of the scheme are as follows::

The salient features of the scheme are as follows: Eligible Institutions: All licensed scheduled banks and those which do not require a license (i.e., the State Bank of India, its associate banks and nationalised banks) are eligible to offer bills of exchange to the RBI for rediscount. There is no objection to a bill accepted by such banks being purchased by other banks and financial institutions but the RBI rediscounts only such of those bills are offered to it by an eligible bank.

Slide 19:

Eligibility of Bills: The eligibility of bills offered under the scheme to the RBI is determined by the statutory provisions embodied in section 17(2)(a) of the Reserve Bank of India Act, which authorise the purchase, sale and rediscount of bills of exchange and promissory notes, drawn on and payable in India and arising out of bona-fide commercial or trade transactions, bearing two or more good signatures, one of which should be that of a scheduled bank or astate co-operative bank and maturing:


POSITION PRESENT OF BILLS DISCOUNTING: Financial services companies had been acting till the early nineties as bill-brokers for sellers and buyers of bills arising out of business transactions. They were acting as link between banks and business firms. At times they used to take up bills on their own account, using own funds or taking short-term accommodation from banks working as acceptance/discount houses. They had been handling business approximating Rs. 5, 000 crores annually. Bills discounting, as a fund based service, made available funds at rates 1% lower than on cash credit finance and bill finance constituted about one-fourth of bank finance.

Slide 21:

However, the bill rediscounting facility was misused by banks as well as the bill-brokers. The Jankiraman Committee appointed by the RBI which examined the factors responsible for the securities scam identified the following misuse of the scheme;

Slide 22:

Banks have been provided bill finance outside the consortium without informing the consortium bankers: They have been drawing bills on companies and they themselves discounted such bills to avail of rediscount facilities; In cases where banks provided additional finance outside the consortium arrangement by way of bill limits covering sales of goods, the sales proceeds had been unavailable to them to provide production finance; Bill finance had been provided to dealers/ stockists of large manufacturing companies without proper appraisal of their credit needs;

Slide 23:

Bills discounted by front companies set up by industrial groups on their parent companies which were obviously accommodation bills were discounted/rediscounted by banks; The rediscounting of bills by finance companies with banks was done at a much lower rate of interest; Although bills are essentially trade documents, bills related to electricity charges, custom charges, lease rentals etc. were also discounted. This was mainly due to the lack of depth in the bills market and NBFC’s felt the need for new instrument or schemes to increase their business; No records regarding bill discounting were ever maintained by banks.

In order to stop misuse of the bill discounting facility by banks, the RBI issued guidelines to banks in July 1992. The main elements of these guidelines are as follows-:

In order to stop misuse of the bill discounting facility by banks, the RBI issued guidelines to banks in July 1992. The main elements of these guidelines are as follows- No fund/non-fund based facility should be provided by banks outside the consortium arrangement. Bill finance should be a part of the working capital/credit limit. Only bills covering purchase of raw materials/inventory for production purposes and sale of goods should be discounted by banks. Accommodation bills should never be discounted.

Slide 25:

Bill re-discounting should be restricted to usace bills held by other banks. The banks should not rediscount bills earlier discounted by finance companies. Funds accepted by banks for portfolio management should not be deployed for discounting bills. Overall credit limit to finance companies including bills discounting should not exceed three times the net worth of such companies; and For discounting LC backed bill NBFC’s, the bill must be accompanied by a non-objection certificate from the finance beneficiary bank.

Slide 26:

As a result, there was substantial decline in the volume of bill discounting. Presently, the volumes are on an average Rs.80-100 crore per month and Rs.800-900 crore per year. The ban on re-discounting has also resulted in falling margins for the NBFCs. They are not able to find cash. Rich companies/individuals ready to discount/rediscount bills.

The usage of discounting of bills is not free of cost. The following are some of the costs associated with the discounting of bills.:

The usage of discounting of bills is not free of cost. The following are some of the costs associated with the discounting of bills. Operational and Procedural Constraints: Wide geographical spread of the buyers. Procedural delays on the part of both the drawer’s and the drawee’s banks. Cumbersome documentation formalities. The usual 90 days usance allowed by the banks is not sufficient. Difficulties in submitting supporting documents. Banks are hesitant to discount bills on new buyers .

Slide 28:

Difficulties experienced in getting bills accepted: The difficulties in getting usance bills accepted by the customers could be classified into the following categories; Cost related: about 60% of the respondents said high cost was an important aspect coming in the way of their customers accepting usance bills. Reluctance on the part of the buyers: It was mainly due to reasons such as commitment to pay the amount on due date, buyers themselves not realising their due in time, government departments and some multinationals not accepting bills as a matter of policy etc.

Slide 29:

Formalities involved: The areas identified were stamping, requirements of board resolution, attested specimen signature etc. Delays: They were mainly due to operational and logistical difficulties in sending and receiving the documents and delays in acceptance of bills by buyers. Other difficulties: They covered areas such as; Buyers’ reluctance to accept bills for fear of problems in accounts reconciliation in case the materials were rejected. Banks insist upon production of original documents (E-mail or Fax not accepted). Buyers’ reluctance due to general slow down in the economy.

Slide 30:

Discounting of bills with banks cumbersome: The procedure of discounting of bills with banks was cumbersome areas are; Stamping of documents Banks not accepting bills of smaller values Non-acceptance by government agencies (as buyers) of power of attorney given by the seller to his bank. Procedural delays. Delays in receiving information from collecting bank regarding acceptance/ non-acceptance of bills. Banks not discounting bills without verifying the credentials of the buyers.

Slide 31:

Dishonor of Bills: The major reasons for dishonor of bills are; Buyers’ do not have funds Return on materials Deliberate dishonor Adverse business conditions.


Conclusion Bill financing is a popular mode of trade financing that helps traders obtain financial accommodation from banks. Bill financing acts as a glucose to the firms who are in need of financial accommodation for their bills of exchange. Financial intermediaries acts as a hospital for the firms and takes care of fund requirement.

Bibliography: :

Bibliography: Financial Institutions and Markets-L.M.BHOLE Merchant Banking and Financial Services- KSOU Seminar papers by- ASHWINI.N, CHAITHRA PATEL.K.P, CHANDRAKALA.P, GEETHA.B & VANISHREE.G.K