BILLS

DISCOUNTING
 Bills of Exchange
 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”.
 Types of Bills
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.
 Creation of B/E
 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 the bill.
 Seller sends the bill to buyer for his acceptance.
 Acceptor may be buyer himself or third party.
 Discounting of B/E
Holder of an accepted B/E has two options
1. Hold on to B/E till maturity and then take
the payment from the buyer.
2. 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
Contd….
 The maturity of a B/E is defined as the date
on which payment falls due.
 Normal maturity periods are 30, 60, 90 or
120 days.
 Bills maturing within 90 days are most
popular.
 Discounting agencies are banks, NBFC,
company, high net worth individuals etc.