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Discounting of Bills of Exchange


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Discounting of Bills of Exchange
Bills of Exchange
Bills of Exchange Types
Discounting of B/E
Precautions While Discounting of BIlls
Precautions by Banks
Precautions by NBFCs

Published in: Economy & Finance
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Discounting of Bills of Exchange

  1. 1. Monday, August 8, 2016 Baibhav Agrawal • Bills of Exchange – What • Bills of Exchange – Types • Bills of Exchange – Creation • Discounting of Bills of Exchange • Discounting of Bills – Advantage to Banks • Processing - Credit Assessment • Precautions – By Banks, NBFCs
  2. 2. Monday, August 8, 2016 Baibhav Agrawal • The bill of exchange (B/E) is used for financing a transaction in goods which means it is essentially a trade related instrument. • According to Negotiable Instruments Act, 1881: “The bills of exchange is an instrument is 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 that instrument”.
  3. 3. Monday, August 8, 2016 Baibhav Agrawal 1. Demand Bill – Payable immediately on presentment to employee. 2. Usance Bill – Time period recognized for payment of bills. 3. Documentary Bill – These B/E are accompanied by documents that confirm trade has taken place. 4. Clean Bills – These Bills are not accompanied by any documents. Interest rate charged is higher than documentary bill.
  4. 4. Step 1 • Two parties i.e. seller sells goods or merchandise to a buyer. Step 2 • Seller would like to be paid immediately but buyer would like to pay after sometime. Step 3 • Seller draws a B/E of a given maturity on the buyer. Step 4 • Seller (Creditor) becomes drawer of the bill and buyer (Debtor) becomes drawee of the bill. Step 5 • Seller sends the bill to buyer for his acceptance. Step 6 • Acceptor may be buyer himself or third party.
  5. 5. Monday, August 8, 2016Baibhav Agrawal Holder of an accepted B/E has two options:  Hold on to B/E till maturity and then take the payment from the buyer.  Discount the B/E with discounting agency. • The act of handing over an endorsed B/E for ready money is called discounting the B/E. The margin between the ready money paid and face value of the bill is called the discount • The maturity of a B/E is defined as the date on which payment falls due. • Normal maturity periods are 30, 60, 90 or120 days. • Bills maturing within 90 days are most popular. • Discounting agencies are banks, NBFC, company, high net worth individuals etc.
  6. 6. Monday, August 8, 2016 Baibhav Agrawal Safety Funds – B/E is a negotiable instrument bearing the signature of two parties considered good for the amount of bill, so he can enforce his claim easily. Certainty of Payment – A B/E is a self liquidating asset with the banker knowing in advance the date of its maturity. Profitability – The discount on bill is front ended, the yield is much higher than in the other loans and advances, where interest paid quarterly or half yearly. Evens out inter-bank liquidity problem –The development of healthy parallel bill discounting market would have stabilized the violent fluctuations in the call money market as banks could buy and sell bills to even out their liquidity mismatches.
  7. 7. Monday, August 8, 2016 Baibhav Agrawal Discounting agencies will do the appraisal of the customer. Credit limit will fix up by discounting agencies The credit limits are based on following considerations : 1. Credit worthiness of drawer (client) 2. Credit worthiness of drawee and dishonor (if any) 3. Nature of Customer’s industry. Once discounting agencies, gives approval for bill discounting, following documents are submitted:- Invoice Challan Receipt of goods (acknowledge by buyer) Promissory Note Railway Receipt/ Truck Receipt Post dated cheque for interest amount
  8. 8. Monday, August 8, 2016 Baibhav Agrawal • Goods covered by documents are those in which the company is dealing • The amount of bill should match with business turnover of the company. • Where discounting agencies is operating or have a branch office. • The credit report on the drawee is satisfactory. • The goods covered under the bill are not of perishable in nature.