BILL DISCOUNTING

BILL OF EXCHANGE
According to the Indian instrument act,1881 , A bill of exchange is an instrument in 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 the instrument. Drawer maker of the bill Drawee- who is directed to pay Payee- to whom it is paid Holder who is having the possession of the bill Acceptor- who accepts the bill

INTRODUCTION A fund based activity Emerged in the early nineties for finance companies The seller, who is the holder of an accepted B /E has two option

Hold on the bill till maturity(30,60,90,120 days) y Discount with a discounting agency
y

Discount is the margin between the ready money paid of the face value of the bill

TYPES OF BILLS
Demand bill Usance bill Documentary bill

D/A bill y D/P bill

y

Clean bill

ADVANTAGES To investors To Banks

y y y y y

Short term source of finance Restricts the amount of loan No tax at source is deducted as it is not a lending Rates of discounts are better Flexibility

To Banks
Certainty of payment y Profitability y Evens out Inter-Bank Liquidity problems y Discount rate and effective rate of interest
y