COMMERCIAL BILL MARKET:

• Purchase and discounting of bills of exchange is

another way of employing bank funds. The amount of
working capital required by companies is mainly
provided by banks through cash credits, overdraft and
purchase or discounting of commercial bills. Bills of
exchange and promissory notes are negotiable
instruments which enable the debtors to discharge
their obligations towards their creditors.
• A commercial bill or a bill of exchange is a short term,
negotiable and self-liquidating money-market
instrument which evidences the liability to make a
payment on a fixed date when goods are purchased
on credit.
• The negotiable instrument Act, 1881 defines a
bill of exchange as “a written instrument,
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.”
• Commercial Bill Market:
Commercial Bill Market is important for trade and
industry and for the development of money market in
the country. Bill financing is considered to be the most
common method of meeting the short-term credit needs
of traders. It is quite possible for even banks to
rediscount the bills in their possession. Thus, banks are
meeting the short-term liquidity requirements of the
traders. The level of liquidity of commercial bills is very
high.

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 • Those bills have a fixed and short tenure of
maturity. Therefore, these bills can be easily
discounted by the banks. As the payment of the bill
must be made on the due date of the bill, the use of
commercial bills as an instrument of credit, imposes
financial discipline on the borrowers.
• Indian commercial bill market has remained in a
state of underdevelopment. The trade, industry and
government departments are reluctant to move
towards the bill culture. It requires observance of
strict financial discipline, particularly on the part of
borrowers. This has been the main cause of
underdevelopment of Indian bill market. There is a
necessity of affixing stamp on each bill. The amount
of stamp duty is very high and many a times stamp
papers of required denomination are not available.
The services of specialized and expert credit
investigating agencies are not adequately available
so as to facilitate valid judgment about the
credibility of the parties concerned. Credit rating
has also become expensive. The bill acceptance
service in the commercial bill market has been very
much restricted. Facilities of rediscounting are
available only with the apex level financial
institution, thus curtailing the size of the bill
market.

KINDS OF BILLS OF EXCHANGE:

The bills of exchange can be classified as follows:
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(a) Time and Demand Bills:
A bill of exchange or a promissory note may be
payable either on demand or after a fixed time. It is
payable on demand when it is expressed to be payable ‘on
demand’ or ‘at sight’ or on presentment, or no time for
payment is specified in it. A bill of exchange may be
payable at a fixed period after its date or after an event
which is certain to happen. A bill of exchange payable at a
later date is also known as ‘Usance’ bill. The usance refers
to the time period recognized by the custom or usage for
the payment of bills.

(b) Trade Bill and Accommodation Bill:

When a bill of exchange is drawn by a seller (creditor)
on the buyer (debtor) in respect of genuine trade
transaction, it is known as Trade Bill. Such bills are drawn
and accepted for consideration. However, a bill of
exchange drawn without any consideration but for
providing financial accommodation of the parties is known
as Accommodation Bill. The accommodation bill does not
arise out of genuine trade transaction. Such bills are not
accepted by the government departments and they do not
have the status of a negotiable instrument.

(c) Clean and Documentary Bill:

A bill of exchange accompanied by a document of title
to goods or any other document is known as Documentary
Bill. In case of home trade, the drawer of a bill delivers to
the banker along with the bill, a railways receipt and in
case if foreign trade, the bill is accompanied by bill of
lading. The documents are delivered by the banker to the
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drawee of the bill against payment or acceptance.
Therefore, they are called as Document against Payment
or Document against Acceptance. If there is no such
document attached to a bill, it is called a clean bill.

(d) Inland a Foreign Bill:

A bill drawn in India and made payable or drawn upon
any person resident in India is called Inland Bill. On the
other hand, a bill of exchange is called a foreign bill, if it is
drawn in India but payable outside India or drawn on a
person residing outside India, or if it is drawn outside India
and payable in India or is drawn on a person residing
outside India and is payable in India. Foreign bills are
drawn in a set of two, three or four in order to avoid delay
which may be caused if a single bill is sent for acceptance
is lost, or miscarried in transit. Foreign bills arise in case of
import-export transactions.

BILL MARKET RATES:

The Bank rate is the rate at which the RBI can
rediscount eligible bills from commercial banks. The SBI
hundi rate is the rate at which the SBI used to discount
hundis of indigenous bankers. The Bazar bill rate is the
rate at which shroffs used to discount bills of small
traders. The Reserve Bank of India fixes the rate at which
the commercial banks can discount bills, it is called
commercial bank’s bill finance rate. Most of the relevant
bill market rates have ceased to be operative and the RBI
has stopped publishing them. The relevant rates which
determines the cost of bill financing are the Bank Rate, the
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SBI Hundi Rate, Bazar Bill Rate, Commercial banks bill
finance rate and the SBI discount rate is the rate at which
the SBI discounts first class commercial usance bills.
DISCOUNT AND FINANCE HOUSE OF INDIA
The RBI later on, set up the Discount and Finance
House of India (DFHI) jointly with public sector banks and
all-India financial institutions in March, 1988. It was
incorporated under the Companies Act, 1956 and
commenced operations from April 25,1988.

OBJECTIVESV OF DFHI:
The DFHI was set up with certain objectives to be
achieved. The primary objective of DFHI was a smoothen
short-term liquidity imbalances by developing an active
money market. It had to integrate the various segments of
the money market by having a close relationship with RBI,
Commercial Banks and All India Financial Institutions. It
was also required to help to bring about better integration
of markets at regional centers with the main market at
Mumbai, through its network. It was also required to
function as a market-maker for securities that are traded
in the derivatives market. DFHI would assist in the
promotion of secondary market for the short term money
market instruments. It would also serve as an active
trader in money market instruments. It would also
facilitate money market transactions for small and
medium sized institutions that are not regular participants
in the market. DFHI would also provide a safe and risk-free
short-term investment avenue to institutions.

OPERATION’S OF DFHI:

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 DFHI has been actively trading in all money market
instruments. It has been done in the following manner.

(a) Offering Quotes: The DFHI quotes regular bid and

offers rates for treasury bills and commercial bills for
rediscounting. It also provides bid prices in respect of
Certificates of Deposits and Commercial Papers. Offer
prices for these instruments are also available whenever
DFHI builds up portfolio of these securities. By quoting
two-way prices for Treasury Bills, Bills Receivables and
other instruments with a fine spread, it makes it attractive
for banks to deal with the company.

(b) Auctions: DFHI takes part in auctions of government

dated securities and its success ratio of auctions as
measured by the ratio of cumulative amounts allotted to
amounts has been quite high.

(c) High Turnover: DFHI imparts greater flexibility to

banks and greater liquidity to financial instruments by
ensuring high turnover of the company’s operations in
money market assets rather than becoming a
depository of these assets.

(d) Reduced Margins: By reducing its margin i.e. the

spread between bid and offer prices DFHI makes trading in
financial instruments more attractive. With significant
resources at its command, greater confidence of money
market operations in its functioning DFHI has come to
occupy an effective presence in the realm of Indian Money
Market.

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