Professional Documents
Culture Documents
Commercial Bills Market and Bill Rediscounting Schemes
Commercial Bills Market and Bill Rediscounting Schemes
In addition, there are indigenous bills of exchange and promissory notes, known as hundis for financing agriculture and inland trade. These were handled by various types of indigenous bankers. Bills of exchange may arise due to genuine trade or commercial transactions of purchase and sale etc., in which case they may be called genuine trade bills. Bills may be created by the borrowers and lenders simply to help each other, without any trading transaction backing the bills. These bills are called accommodation bills or kite bills or wind bills. When two parties draw bills on each other for creating instruments which they can discount from their respective bankers, and thus meet their financial requirements, these are accommodation bills. Thus, an accommodation bill can be defined as one where an accommodating party accepts the bill by putting his name to accommodate another person to help him tide over his temporary cash mismatches, without receiving any consideration. Accommodation bills are also raised when payments are not coming promptly or the buyer does not accept the documents as normally happens in the case of government supplies. A bill drawn by a supplier or contractor on the government or semi-government department for the supplies made to such departments is supply bills. These bills are not accompanied by documents of title to the goods supplied. They are also not 'accepted by government departments. As such, these bills do not enjoy status of a negotiable instrument. But the supplier can obtain advance from commercial banks against such bills and meet his financial needs pending payments from the government department. These bills are not negotiable instruments. Therefore, advances by banks against supply bills are clean advances.
The practice in India is that the banks when they discount bills, they hold it as a security and in case of non-payment by the drawee they take recourse to the drawer. Banks get double enforcement rights, i.e. against the drawer and also against the drawee, in case of non-payment of bills. Bills become more secure and can be discounted, at extremely fine rates, if they are accepted by the drawees banker. In developed markets there are acceptance houses who, after due diligence, give acceptance for a fee, thereby imparting greater security to the bill.
(v) (vi)
(vii)
An efficient bill market imparts flexibility to the money market by evening out liquidity in the banking system. .
(x) (xi)
Weaknesses of Indian Bill Market or Why Indian Bill Market Remained Underdeveloped
Despite some growth during the last decade, Indian bill market continues to be underdeveloped due to the following reasons: (i) There has been a reluctance on the part of trade and industry and government departments to move towards a bill culture which requires observance of strict financial discipline, particularly on the part of borrowers. There has been a need to affix stamp on each bill. Stamp papers of required denomination are not available many a times. Services of specialised credit investigating agencies were earlier totally missing. Absence of an active secondary market, as the rediscounting has been permitted only with the apex level financial institutions, curtailed the size of bill market. There have been administrative problems like physical scrutiny of invoices accompanying bills to ensure that they are trade related, physical presentation of bills for repayment, requirement of physical endorsement and re-endorsement of bills at the time of rediscount. The bill acceptance service in commercial bill market has been very much restricted. Rediscounting facility is available only at Bombay. Calcutta. Delhi, Madras, Ahmedabad. Bangalore. Hyderabad. Nagpur. Kanpur and Patna. In developed countries bill market was established mainly for financing foreign trade. In India, foreign trade as percentage to national income has always remained small and so the size of bill market. Indian government has entered into trading activity in a big way through public sector units like STC, MMTC, FCI etc. The government does not prefer financing its activities through commercial bills. Approach of commercial banks is reflected in their following behaviour: (a) Commercial banks discounting them. prefer purchasing bills, rather than
(v)
(vi) (vii)
(viii)
(ix)
(x)
(b)
Major part of bills discounted by banks are not genuine trade bills. They are created by converting cash credit and overdrafts of their customers. In many cases bill financing by banks is of the nature of loans against the security of bills, rather than in the form of purchase or rediscounting of bills. Banks are shy of rediscounting bills with other commercial banks having excess liquidity so that bill market does not fully serve the purpose of evening out liquidity in the banking system. Now larger number of institutions, in addition to commercials banks, e.g., LIC, UTI, GIC, ICICI, Nabard, SIDBI, IFCI and DFHI etc., are participating in bill market. Banks have a tendency to hold purchased or discounted bills till the completion of their maturity period. This reduces the velocity of circulation of bills and acts as a constraints in the expansion of bill market.
(c)
(d)
(e)
The popularity of bill of exchange as a credit instrument and as a money market instrument depends on maintenance of financial discipline and shiftability of bills. The shiftability of bills depends on the availability of acceptance services and credit rating services and the readiness of the central bank to supply credit to the money market during period of shortages. A number of steps have been taken form time to time to activate and expand bill market in India.
allow credit facilities to exports on a more liberal basis. Despite these efforts the BMS could not make headway in developing bill culture.
Objectives of BRS
The objectives of BRS are as follows: (i) (ii) Creation of an instrument of credit linked with the genuine transactions of purchase and sale; Creation of an instrument of credit which encourages a more disciplined use of bank credit than that practiced under usual cash credit and book debt loan; Creation of a money market instrument for evening out liquidity in the banking system; Developing a subsidiary market in commercial bills and making the money market more deep and wide; and Creation of an instrument which banks could get rediscounted with other financial institutions.
(i) (ii)
It should be a genuine trade bill, i.e., it should arise out of a genuine transaction of purchase and sale. The nature of the transaction and the particulars of the documents of title to goods relating to the transaction should be indicated on the face of the bill. The bill has to be drawn on, and accepted by the purchasers licensed scheduled bank. In case the purchasers bank is not a licensed scheduled bank the bill has to, in addition bear an endorsement of a licensed scheme bank Joint bills, i.e., the bills drawn on the buyer and his bank jointly and bills jointly accepted, are also eligible for rediscounting. Eligible bill should have usance of not more then 90 day. In exceptional cases, where the bill has usance up to 120 days, it can be rediscounted only if the remaining maturity period does not exceed 90 days at the time of its presentation for rediscounting. The bill should have at least two good signatures, one of which has to be of a licensed scheduled bank. Bill arising out of sale of commodities covered by the RBI under selective credit controls, are not eligible for rediscounting. Bills drawn by textile mills, and traders and dealers in textiles are eligible for rediscount provided usance of bill does not exceed 60 days. Bills drawn on customers within the same business group are eligible for rediscounting provided the drawer and the drawee are separate legal entities. Bills arising out of sale of goods to government departments, semigovernment organisation, statutory corporations and government companies are also eligible for rediscounting provided all conditions under the scheme are satisfied. Initially, the minimum amount of single bill was fixed at Rs. 5000 and the minimum limit of a single advance was fixed at Rs, 50000. These limits were done away with since November 1971 because banks are, since then, not required to lodge bills with the RBI or other institutions for purposes of rediscounting. However, a single bill to be eligible cannot be a value less than Rs. 1000.
(x)
(xi)
(xii)
(xiii) (xiv)
Banks enjoy refinance facilities against commercial bills throughout the year. Multani and accommodation bills are not eligible for rediscounting.
Why New Bills Market Schemes (NBMS) or Bill Rediscounting Scheme (BRS) had Slow Success?
Despite attempts by the RBI the NBMS failed to expand at the desired pace due to the following reasons: (i) Indian businessmen have shown reluctance in accepting financial discipline implicit in the BRS which requires firm commitment for payment on majority date. Many big businessmen, particularly monopolists in an item regard it against their prestige to accept bills. NBMS had limited coverage as it excluded sensitive commodities covered by the selective credit controls by the RBI (barring textiles), Supplies to government departments were not initially covered, though, the coverage of NBMS was extended to them in July 1971.
(v) (vi)
Very poor response of public sector undertakings of NBMS, though they had occupied commanding heights in the economy. Restriction of permitted limit of credit under the scheme to 90 days also limits the scope of NBMS. In certain trades, e.g., wholesale textile business, normal credit period is 6 months to 9 months. Application of NBMS for all practical purposes, is confined to the rediscounting centres alone due to operational difficulties. Small businessmen find it difficult to get bills accepted by banks. This is an essential requirement under the scheme. Credit rating agencies were also non existent before the setting up of CRISIL and ICRA. Commercial banks generally did not rediscount bills with other commercial banks but approached straight to the RBI whenever there was urgent need to funds and/or bill rediscounting proved cheaper than call loans. The RBI, thus, acted as the lender of the first resort rather than the lender of last resort. Stamp duty on bills and non-availability of stamp papers also led to tardy progress of NBMS. Later stamp duty was removed.
(xi)
(ii)
Working capital limits of large enterprises should be scaled down and simultaneously the interest rates should be increased if bill acceptances are less than the stipulated percentage of credit purchases. Attempt should be made to move away form receivable financing to bill financing so that by March 1990, financing through cash credit/overdrafts gets reduced to 25 per cent. Bill limits for CAS parties should be increased temporarily at the discretion of banks. Bill financing should not be subjected to the stipulation of unsecured advances. The maximum discount rate on bills should not exceed effective interest rate of 16 per cent. Of course, the ultimate objective should be to settle for market-determined interest rate structure. The ceiling on the rediscount rate should be increased from 11.5 per cent to 12.5 per cent. Ultimately, the ceiling should be removed. Only those companies, institutions, trusts, etc., should be allowed to participate in the bill market which have a resource surplus of Rs. 5 core or more, on a regular basis. Rediscounting procedure should be simplified and it should be freely permitted. Banks should ask their big clients (those enjoying working capital limit of Rs. 6 crore) to pay for their credit purchases through bills. Banks should streamline their operations in regard to the conduct of bill limits so as to achieve a greater financial discipline.
(iii)
(vii) (viii)
Following the recommendation of Vaghul Group various steps were taken for enlarging and activating the bill market: (i) The RBI lowered the ceiling rate of interest on advances form 17.5 per cent o 16.5 per cent and later to 15.5 per cent. The RBI fixed the interest rate on bills one percentage point below the new maximum lending rate.
(ii)
The ceiling on rediscount rate was increased form 11.5 per cent to 12.5 per cent with a view to attracting market players with surplus funds, such as UTI, LIC etc., to the bill market. With effect from April 1, 1988, the RBI advised the banks that only 75 per cent of the receivables would be eligible for the drawing power on cash credit/overdraft facility. The remainder 25 per cent is to be met through demand usance bills. Only July 23, 1988 the government waived stamp duty on usance bills of exchange subject to the following conditions.: (a) (b) (c) They are payable not more than 90 days after date or sight. They are drawn on or made by or in favour of a commercial bank or a co-operative bank, They arise out of a genuine commercial or trade transaction.
(iii)
(iv)
(v)
For developing the secondary market in bills by simplifying the procedures and documentation involved in rediscounting the bill, the RBI, since September 1988, introduced the innovation of a derivative usance promissory note to be issued by the discounter on the strength of underlying bills with a tenor corresponding to or less than the tenor of the derivative usance promissory note and in any case not more than 90 days. The derivative promissory note was exempt form stamp duty. Proforma for facilitating successive rounds of rediscounting was also specified. Setting up of DFHI, in April 1988, as a premier money market institution was a leap forward in promoting secondary market in bills.
(vi)
DFHIs operations in commercial bills have increased at a fast rate sine its inception. DFHI offers two-way quotes for buying and selling rediscounted bills. Since it gets refinance from the RBI, it is able to finance adequate resources in case of need. (vii) The RBI has enlarged the list of participants in the bill market Institutions approved for rediscounting bills include: 91) all commercial banks, (2) LIC and its subsidiaries. (3) GIC and its subsidiaries, (4) DFHI, (5) UTI, (6) ICICI, (7) IRBI, (8) ECGC, (9) NABARD, (10) IFCI, (11) NHB, (12) SCICI, (13) IDBI, (14) EFCI, (15) Exim Bank, (16) MSCB, (17) SIDBI, (18) Select UCBs, (19) SBI Mutual fund, (20) Canbank Mutual Funds, (21) LIC Mutual Fund, (22) Punjab National Bank Mutual Fund, etc.
(viii) (ix)
Commercial bill rediscounting rates were totally freed w.e.f. May 1, 1989. The endorsement and delivery of bill at the time of rediscounting was done away with, facilitating multiple rediscounting and imparting greater liquidity to bills. Drawee bill scheme was promoted for securing prompt payment to the small-scale units. Bill Finance for Settlement of Dues of SSI Suppliers. Earlier, in the interest of developing bills culture in the system, banks were advised that, out of total inland credit purchases of the borrowers, not less than 25 per cent should be through bills drawn on them by concerned sellers. However, the scheme had not developed and some of the corporates were not keen on bill finance. SSI units supplying goods to corporates have been complaining that their dues are not promptly settled by the corporates, with the result, their manufacturing activities suffered.
(x) (xi)
With a view to ensure prompt settlement of dues of SSI units, as also encouraging bills culture, banks have been advised to ensure that with effect from January 1, 1998, of the total inland credit purchases of the borrowers, not less than 25 per cent should be through bills drawn on them by concerned sellers. The RBI has, thus, taken a number of steps to revive the bills market. A minimum 25 per cent of bank limit are by way of bills, stamp duty on bills of upto 90- day usance and discounted through bank has been waived, and a number of new players have been permitted to participate in the rediscounting market giving it greater depth and liquidity. Despite all these efforts, the bill culture has not really picked up in India. This is mainly due to lack of supply of quality bills and also because the government and public sector units are important buyers. The continued insistence of the banks to treat bills only as a security, and the availability of alternate, less cumbersome and cheaper means of finance have also restricted the growth of the bill market. Bills rediscounting market witnessed lower activities during 1997-98. Total amount of bills rediscounted by Scheduled Commercial Banks (SCBs) with the financial institutions, mutual funds and the Primary Deals (PDs) decreased from Rs. 1029 crore in end-March 1997 to Rs. 286 crore by end-March 1998 and then increased to Rs. 408 crore by end-August 1998.
Commercial banks are allowed to draw derivative usance promissory notes for maturities up to 90 day on the strength of commercial bills discounted by their branches. In case of original discounting the discounter bank issues the derivative usance promissory note in favour of the bank/other approved institutions with which the bills have been discounted. The discounting bank holds such unencu bered usance bills till the date of maturity of its own derivative usance promissory note. As the bills mature during the currency of the derivative promissory note, the drawer banks should ensure that these bills get deleted form the cover, and are replaced by fresh eligible bills so that the overall cover remains intact. The function of rediscounting of bills and drawing derivative promissory notes is centralized with the banks main fund management centre so that effective control can be exercised on this activity and the benefits of specialization are also achieved. The discounting bank maintains a register containing true and complete details of usance bills held in support of derivative promissory notes issued by it. The rediscounting bank also issues a certificate to the rediscounter bank/approved institution certifying holding of unencumbered commercial bills of adequate value. The RBIs directives regarding operation of bill rediscounting are as follows: (i) (ii) (iii) (iv) (v) (vi) Rediscounting in excess of eligible bill will be treated as unsecured borrowing. Bills discounted by non-bank financial companies should not be rediscounted by banks. Only usance bills held by other banks can be rediscounted. Finance companies cannot avail of rediscounting facilities. Bill financing is art of fund-based limits. Accommodation bills cannot be rediscounted. Only those bills which arise due to purchase of raw materials or inventory for production purposes and sale of goods can be discounted. Bills which cover payment of electricity charges, custom duties, lease rent installment, hire purchase, sale of securities, etc, cannot be discounted.
(vii)
Bazar bill rate, i.e., the rate at which shroffs and other-moneylenders used to discount bills of small traders; SBI hundi rate, i.e., the rate at which the SBI used to discount hundis of indigenous bankers; Commercial banks bill finance rate, i.e., the rat of which commercial banks can get bills discounted from each other; SBI discount rate, i.e., the rate at which the SBI discounts first class usance bills; Bank rate, i.e., the rate at which the RBI rediscounts eligible bills from commercial banks; DFHI rate, i.e., the rate at which the DFHI buys and sells eligible bills from commercial banks and other approved institutions. The DFHI quotes both the buying and the selling rates.
Many of these rates stopped being available long time back. The SBI discount rate increased from 8.5 per cent in 1970-71 to 16.5 per cent in 1975-76. After that it declined to 13 per cent in 1980-81, rose again to 17.5 per cent in 1985-86 and fell down to 15.5 per cent in 1987-88 after which the DFHI started quoting buying and selling rates for commercial bills. There had also been a lot of fluctuations in discount rate. For example the DFHIs bid rat was 14 per cent in January 1991 and had touched a high of 25 per cent in November 1991. Towards the close of 1995-96 the DFHI buying rate was 16.5 per cent and on May 16, 1996 it was 15.5 per cent. Discount rates declined sharply in second half of 1996 and during 1997-98. During October 1997 till the announcement of the credit policy on October 21, DFHI was discounting commercial bills at 10.50 per cent. Discount rate fell further after that in tune with the overall decline in interest rates.
Computation of Yield
A usance promissory note for bill rediscounting is issued at a discount, i.e., the discount is realized at the time of rediscounting. Such discount can be reinvested. Thus the yield to the buyers of bills if more than the discount rate. The yield can be calculated with the help of the following formulas:
Actual Yield
[(1 + .
Where P=
R=
Period of compounding in one year, e.g., if it is a 3 months bill, then period of compounding is 12 months/3 months = 4 or 365/ no. of days.
For example, if it is a 3 months bill and the discount rate is 15.5 per cent then yield will be as follows:
Yield
[(1 + .
= = =
switch over of its assets. Thus the banks are saved of the obligation of maintaining higher liquidity reserves on borrowing through BRS. To the lender of funds discounter banks or other institutions lending by rediscounting of derivative promissory note is very safe and highly liquid. The repayment on due date is assured. These notes can be rediscounted. Due to the DFHIs practice of regularly offering two-way quotes, there is a well-developed secondary market in bills. In case the discounter is a scheduled commercial bank, then the amount lent is adjusted against liabilities of the banking system reducing its NDTL In addition, if there is a developed bill market, the bank rate variations become a more effective weapon of monetary control because the impact of changes in the bank rate will influence the entire banking system through a sensitive and efficient bill market.