A commercial bill is one which arises out of agenuine trade transaction, i.e. credittransaction. As soon as goods are sold oncredit, the seller draws a bill on the buyer forthe amount due. The buyer accepts itimmediately agreeing to pay amountmentioned therein after a certain specifieddate. Thus, a bill of exchange contains awritten order from the creditor to the debtor, topay a certain sum, to a certain person, after acreation period. A bill of exchange is a „self-liquidating‟ paper and negotiable; it is drawnalways for a short period ranging between 3months and 6 months.
Definition of a billSection 5 of the negotiable Instruments Act defines a bill exchangea follows:“an instrument in writing containing an unconditional order, signedby the maker, directing a certain person to pay a certain sum ofmoney only to, or to the order of a certain person or to the bearerof the instrument”.
Types of Bills Many types of bills are in circulation in a bill market. They can be broadly classified as follows:• Demand and usince bills.• Clean bills and documentary bills.• Inland and foreign bills.• Export bills and import bills.• Indigenous bills.• Accommodation bills and supply bills
Demand and USINCE BillsDemand bills are other wise called sight bills. These billsare payable immediately as soon as they are presented tothe drawee. No time of payment is specified and hencethey are payable at sight. Usince bills are called timebills. These bills are payable immediately after the expiryof time period mentioned in the bills. The period variesaccording to the established trade custom or usageprevailing in the country.
Clean Bills and Documentary BillsWhen bills have to be accompanied by documents of title to goods likeRailways, receipt, Lorry receipt, Bill of Lading etc. the bills are called documentarybills. These bills can be further classified into D/A bills and D/P bills. In the case ofD/A bills, the documents accompanying bills have to be delivered to the draweeimmediately after acceptance. Generally D/A bills are drawn on parties who have agood financial standing. On the order hand, the documents have to be handed over tothe drawee only against payment in the case of D/P bills. The documents will beretained by the banker. Till the payment of such bills. When bills are drawn withoutaccompanying any documents they are called clean bills. In such a case, documentswill be directly sent to the drawee.
Inland and Foreign BillsInland bills are those drawn upona person resident in India and arepayable in India. Foreign billsare drawn outside India an theymay be payable either in India oroutside India. They may bedrawn upon a person resident inIndia also. Foreign bills havetheir origin outside India. Theyalso include bills drawn on Indiamade payable outside India
Export and Foreign BillsExport bills are those drawn by Indian exports onimporters outside India and import bills are drawn onIndian importers in India by exports outside India.
Indigenous BillsIndigenous bills are those drawn and accepted according tonative custom or usage of trade. These bills are popularamong indigenous bankers only. In India, they called„hundis‟ the hundis are known by various names such as„Shah Jog‟, „Nam Jog‟, Jokhani‟, Termain jog‟. „Darshani‟,„Dhani jog‟, and so an.
Accommodation Bills and Supply BillsIf bills do not arise out of genuine trade transactions, they are calledaccommodation bills. They are known as „kite bills‟ or „wind bills‟. Twoparties draw bills on each other purely for the purpose of mutualfinancial accommodation. These bills are discounted with bankers andthe proceeds are shared among themselves. On the due dates, they arepaid. Supply bills are those neither drawn by suppliers or contractors onthe government departments for the goods nor accompanied bydocuments of title to goods. So, they are not considered as negotiableinstruments. These bills are useful only for the purpose of gettingadvances from commercial banks by creating a charge on these bills.
Operations in Bill Market From the operations point of view, the bill market can be classified into two viz.• Discount Market• Acceptance Market
Discount MarketDiscount market refers to themarket where short-term genuinetrade bills are discounted byfinancial intermediaries likecommercial banks. When creditsales are effected, the seller drawsa bill on the buyer who accepts itpromising to pay the specifiedsum at the specified period. Theseller has to wait until the maturityof the bill for getting payment.
Acceptance MarketThe acceptance market refers to the market where short-term genuinetrade bills are accepted by financial intermediaries. All trade bills cannotbe discounted easily because the parties to the bills may not befinancially sound. In case such bills are accepted by financialintermediaries like banks, the bills earn a good name and reputation andsuch bills can readily discounted anywhere. In London, there arespecialist firms called acceptance house which accept bills drawn bytrades and import greater marketability to such bills. However, theirimportance has declined in recent times. In India, there are no acceptancehouses. The commercial banks undertake the acceptance business tosome extant.
Advantages of commercial bills• Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages:• Liquidity: Bills are highly liquid assets. In times of necessity, bills can be converted into cash readily by means of rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure.• Certainty Of Payment: Bills are drawn and accepted by business people. Generally, business people are used to keeping their words and the use of the bills imposes a strict financial discipline on them. Hence, bills would be honored on the due date.
• Ideal Investment: Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities.• Simple Legal Remedy: In case the bills are dishonored, the legal remedy is simple. Such dishonored bills have to be simply noted and protested and the whole amount should be debited to the customer‟s accounts.• High And Quick Yield: The financial institutions earn a high quick yield. The discount is dedicated at the time of discounting itself whereas in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high.
Drawbacks of commercial bills• Absence Of Bill Culture: Business people in India prefer O.D and cash credit to bill financing therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular.• Absence Of Rediscounting Among Banks: There is no practice of re- discounting of bills between banks who need funds and those who have surplus funds. In order to enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular.• Stamp Duty: Stamp duty discourages the use of bills. Moreover, stamp papers of required denomination are not available.• Absence Of Secondary Market: There is no active secondary market for bills. Rediscounting facility is available in important centers and that too it restricted to the apex level financial institutions. Hence, the size of the bill market has been curtailed to a large extant.
• Difficulty In Ascertaining Genuine Trade Bills: The financial institutions have to verify the bills so as to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to be scrutinized carefully. It involves additional work.• Limited Foreign Trade: In many developed countries, bill markets have been established mainly for financing foreign trade. Unfortunately, in India, foreign trade as a percentage to national income remains small and it is reflected in the bill market also.• Absence Of Acceptance Services: There is no discount house or acceptance house in India. Hence specialised services are not available in the field of discounting or acceptance.• Attitude Of Banks: Banks are shy rediscounting bills even the central bank. They have a tendency to hold the bills till maturity and hence it affects the velocity of circulation of bills. Again, banks prefer to purchase bills instead of discounting them.
DFHIDiscount and Finance House of India Ltd. (DFHI), a unique institution ofits kind, was set up in April 1988. The share capital of DFHI is Rs 200crores, which has been subscribed by Reserve Bank of India (10.5%), Publicsector banks (62%) and Financial Institutions (26.6%). The discount hasbeen established to deal in money market instruments in order to provideliquidity in the money market. Thus the task assigned to DFHI is todevelop a secondary market in the existing money market instruments.The establishment of a discount House was recommended by a WorkingGroup on Money market. The main objective of DFHI is to facilitate thesmoothening of the short term liquidity imbalances by developing an activemoney market and integrating the various segments of the money market
At preset DFHI‟s activities are restricted to: 1. dealing in 91 days and 364 days Treasury Bills 2. re-discounting short term commercial bills. 3. participating in the inert bank call money, notice money and term deposits 4. Dealing in Commercial Paper and Certificate of deposits. 5. Government dated Securities
Role of DFHI–Functions as market maker in Certificate of Deposits market–Offers bid and offer rate for Certificate of Deposits–Acts as an ideal conduct for disinvestments of Certificate of Deposits holdings–Engages in buying Certificate of Deposits from the bank at bid discount rate