Discounting of B/E
The seller who is the holder of a accepted
B/E has two options :
Hold on the B/E till maturity and then take the
payment from buyer.
Discount the B/E with discounting agency.
Note : However the option (2) is much more
attractive as seller gets ready cash
Seller can take the accepted B/E to a discounting
agency and obtain ready cash.
The act of giving accepted B/E for ready money is
call discounting the B/E.
The difference between ready money paid and
the face value of the bill is called the discount.
Types of Bills
Demand Bill : Payable immediately
Usance Bill : Time bill
Documentary Bill : Accompanied by documents
Clean Bill : Not accompanied by any documents
Advantages : To banks
of Funds : Bearing signatures of two
: Discount is front-ended, so as
yield is much higher than loans
out Inter-bank Liquidity Problems :
Stabilized the fluctuations in the call money
Processing - Credit Assessment
Discounting agencies will do the appraisal
of the customer.
Credit limit will fix up by discounting
The credit limits are based on following
Credit worthiness of drawer (client)
Credit worthiness of drawee and dishonour if any
Nature of Customer’s industry.
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
Precautions – By Banks, NBFCs
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.
How to deal in case of Default ?
Cycle of Liabilities in bill discounting transaction :
Bill Discounting Agencies
In case of default, bill discounting agency can lodge
the complaint under Negotiable Instrument Act.
In real life, it is preferable to have negotiation and
Loopholes/ Grey Areas
Who are the prime users of Bill Discounting facility
in India and which are concerns?
Kite Flying : The practice of discounting
accommodation bills are known as kite flying.
Supply Bills : B/E drawn by Suppliers/ Contractors
to Government. It depress the level of cash flow in
the bill market.
Several corporate house do not accept B/E
drawn on them.
Accepting such bills is somewhat damaging their
Such attitude discourage the culture of using
Bill Market Scheme, 1970
made by Dahejia
New bill market scheme was introduced to
facilitate the re-discounting of eligible B/E by
banks to RBI
Salient Features of Bill Market
Eligibility of Bills
Procedure for Rediscounting
Other Additions/developments in this
Eligible Institutions :
Licensed scheduled banks and those which don’t
Above scheduled banks are eligible to rediscount
bills of exchange with RBI.
Eligibility of Bills
Drawn or payable in India
Bearing two or more signatures, one of which
should be of bank and B/E maturing :
Export of goods from India, within 180 days
Any other case, 90 days from the purchase
The scheme is eligible for only genuine trade bills
arising out of genuine sale of goods & if 90-120 days ?
Procedure for Rediscounting :
At maturity RBI gives back re-discounted bills to
banks against the payment.
Maturity period less than 30 days can not be rediscounted with RBI.
Additions/Developments in this scheme:
Setting up Discount and Finance House of India
Remission of Stamp duty
The re-discounting facility from RBI has
gradually slowed down and encouraged
rediscount with one another bank and approved
financial institutions (e.g. LIC, GIC, ICICI etc.)
stop misuse RBI has issued guidelines
which are as follows :
Bill covering purchase of raw material or sale of
goods should be discounted by banks.
Kite Flying/Accommodated bills should never be
No fund facility should be provided by banks
outside the consortium arrangement
The banks should not re-discount the bills earlier
discounted by banks with NBFCs.
As a result, there is drastic decline in bill
discounting transaction. Presently, the
monthly turnover on an average is Rs.100
crore and Rs. 800-900 crore per year. The ban
on re-discounting also resulted in decline of
business of NBFCs.