• 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
• 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”.
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.
• Two parties i.e. seller sells goods or merchandise to a buyer.
• Seller would like to be paid immediately but buyer would like to pay after sometime.
• Seller draws a B/E of a given maturity on the buyer.
• Seller (Creditor) becomes drawer of the bill and buyer (Debtor) becomes drawee of
• Seller sends the bill to buyer for his acceptance.
• Acceptor may be buyer himself or third party.
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
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.
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
Receipt of goods (acknowledge by buyer)
Railway Receipt/ Truck Receipt
Post dated cheque for interest amount
• 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.