BANK

&
BILL DISCOUNTING

Lalita Choudhary
TYBBI, 11
 INDEX

Introductio

Types of Bank

Bank Overview

Bill Discounting

Eligibility of Bill Discounting

Documents

Bill Re-Discounting Scheme

Types of Bill

Documents for Bill of Exchange

INTRODUCTION

Banking in India:

Originated in the first decade of 18th century with The General Bank of
India coming into existence in 1786. This was followed by Bank of Hindustan.
Both these banks are now defunct. The oldest bank in existence in India is the State
Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806.
A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active trading
port, mainly due to the trade of the British Empire, and due to which banking
activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as
Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai -
both of which were founded under private ownership. The Reserve Bank of India
formally took on the responsibility of regulating the Indian banking sector from
1935. After India's independence in 1947, the Reserve Bank was nationalized and
given broader powers.
Contents

 Nationalization
 Liberalization

Nationalisation

The next significant milestone in Indian Banking occurred on July 19, 1969
when the then Indira Gandhi government nationalized the 14 largest commercial
banks. A second nationalization of 6 more commercial banks followed in 1980.
The stated reason for the nationalisation was to give the government more control
of credit delivery. After this, until the 1990s, the nationalised banks grew at a
leisurely pace of around 4%, closer to the average growth rate of the Indian
economy.

Liberalisation

In the early 1990s the then Narasimha Rao government embarked on a

policy of liberalisation and gave licenses to a small number of private banks, which
came to be known as New Generation tech-savvy banks, which included banks
such as UTI Bank (the first of such new generation banks to be set up), ICICI Bank
and HDFC Bank. This move, along with the rapid growth in the economy of India,
kickstarted the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private
banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation
in the norms for Foreign Direct Investment, where all Foreign Investors in banks
may be given voting rights which could exceed the present cap of 10%.

The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods
of working for traditional banks. All this led to the retail boom in India. People not
just demanded more from their banks but also received more.
TYPES OF BANKS

o Public Sector Banks

o Private Sector Banks
o Foreign Banks

Public Sector Banks

The Bank of Bengal, which later became the State Bank of India.

SBH group : State Bank of India, with its seven associate banks command the
largest banking resources in India. SBH and its associate banks are:

 State Bank of India

 State Bank of Bikaner & Jaipur
 State Bank of Hyderabad
 State Bank of Indore
 State Bank of Mysore
 State Bank of Patiala
 State Bank of Saurashtra
 State Bank of Travancore
After the amalgamation of New Bank of India with Punjab National Bank,
currently there are 19 nationalised banks in India:

 Allahabad Bank
 Andhra Bank
 Bank of Baroda
 Bank of India
 Bank of Maharashtra
 Canara Bank
 Central Bank of India
 Corporation Bank
 Dena Bank
 Indian Bank
 Indian Overseas Bank
 Oriental Bank of Commerce
 Punjab & Sind Bank
 Punjab National Bank
 Syndicate Bank
 Union Bank of India
 United Bank of India
 UCO Bank
 Vijaya Bank
Private Sector Banks

 Bank of Rajasthan
 Bharat Overseas Bank
 Catholic Syrian Bank
 Centurion Bank of Punjab
 Dhanalakshmi Bank
 Federal Bank
 HDFC Bank
 ICICI Bank
 IDBI Bank
 IndusInd Bank
 ING Vysya Bank
 Jammu & Kashmir Bank
 Karnataka Bank
 Karur Vysya Bank
 Kotak Mahindra Bank
 SBH Commercial and International Bank
 South Indian Bank
 Tamilnad Mercantile Bank Ltd.
 UTI Bank
 YES Bank
Foreign Banks

 ABN AMRO BANK N.V.

 Abu Dhabi Commercial Bank Ltd
 Bank of Ceylon
 BNP Paribas Bank
 Citi Bank
 China Trust Commercial Bank
 Deutsche Bank
 HSBC
 JPMorgan Chase Bank
 Standard Chartered Bank
 Scotia Bank
 Taib Bank

Currently (2007), overall, banking in India is considered as fairly mature in

terms of supply, product range and reach-even though reach in rural India still
remains a challenge for the private sector and foreign banks. Even in terms of
quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets-as compared to other banks in comparable
economies in its region.

The Reserve Bank of India is an autonomous body, with minimal pressure from
the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility-without any stated exchange rate-and this has mostly been true.
 With the growth in the Indian economy expected to be strong for quite some
time-especially in its services sector, the demand for banking services-especially
retail banking, mortgages and investment services are expected to be strong.
M&As, takeovers, asset sales and much more action (as it is unravelling in China)
will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase
its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first
time an investor has been allowed to hold more than 5% in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector

banks (that is with the Government of India holding a stake), 29 private banks
(these do not have government stake; they may be publicly listed and traded on
stock exchanges) and 31 foreign banks. They have a combined network of over
53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a
rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.
About Bank / Overview

Our Mission

“To achieve pre-eminence in banking and financial sectors with

commitment to excellence in customer satisfaction, profit maximisation and
continued emphasis on developmental banking through a skilled and committed
work force by providing training facilities and technological upgradation"

Banking Overview

The major participants of the Indian financial system are the

commercial banks, the financial institutions (FIs), encompassing term-
lending institutions, investment institutions, specialized financial institutions
and the state-level development banks, Non-Bank Financial Companies
(NBFCs) and other market intermediaries such as the stock brokers and
money-lenders. The commercial banks and certain variants of NBFCs are
among the oldest of the market participants. The FIs, on the other hand, are
relatively new entities in the financial market place.
BILL DISCOUNTING

Bill discounting as a fund-based activity, emerged as a profitable business in

the early nineties for finance companies and represented a diversification in their
activities in tune with the emerging financial scene in India. In the post-1992
(scam) period its importance has substantially declined primarily due to restrictions
imposed by the Reserve Bank of India.

Advantages:

The advantages of bill discounting to investors and banks and finance companies
are as follows

To Investors:

Short term sources of finance

1) Bills discounting being in the nature of a transaction is outside the purview of

section 370of the Indian Companies ACT 1956 that restricts the amount of
loans that can be given by a group companies
2) Since it is not a lending no tax at source is deducted by the making the payment
charges which is very convenient not only form cash flow point of view but
also from the point of view of the companies that do not envisage tax liabilities.
3) Rates of discount are better then those available on ICDs
4) Flexibility not only in the quantum of investments but also in the duration of
investments

To Banks:

1) Safety of funds the greatest security of a banker is that a B/E is a negotiable

instrument bearing signature of two parties considered good for the amount
for bill so he can enforce his claim easily
2) Certainty of Payments: A B/E is a self liquidating asset with the banker
knowing in advance the date its maturity dies bill finance obviates the need
for maintaining large, unutilized idle cash balances as under the cash credit
system. It also provides banks grater control over there drawls.

Profitability: Since the discount on the bill is front ended the yield is much higher
the in other loans and advances where interest is paid quarterly or half yearly.

Evens out inter –Bank liquidity problems:

The development of healthy parallel bill discounting market would have

stabilized the violent fluctuations in the call money market as banks could buy and
sell bills to even out there liquidity mismatches.

Discount Rate and Effective Rate of Interest:

 Banks and finance companies discounting bills prefer to discount L/C (letter
of credit)-backed bills compared to clean bills. The rate of discount applicable to
clean bills is usually higher than the rate applicable to L/C-based bills. The bills are
generally discounted up-front that is the discount is payable in advance.

As a consequence the effective rate of interest is higher than the quoted rate
(discount). The discount rate rises from time to time depending upon the short-term
interest rate.

Eligibility Of Bills:

The eligibility of bills offered under the shame to the RBI is determined by
the statutory provisions embodied in section 17(2) (a) of the Reserve Bank of India
Act, which authorize the purchase sale and rediscount of bills of exchange and
promissory notes, drawn on and payable in India and arising out of bona fide
commercial or trade transition, bearing two or more good signatures, one of which
should be that of scheduled bank or a state co-operative bank and maturing:

a) In the case of bills of exchange and promissory notes arising out of any
such truncation relating to the export of goods from India with in one
hundred and eighty days.
b) In any other case, with in ninty days from the date of purchase or
rediscount exclusive of days of grace;
c) The scheme is confined into genuine trade bills arising out of genuine sale
of goods. The bills should normally have a maturity of not more than ninty
days. The bill having maturity 90to120 days is also eligible for rediscount,
provided at the time offering to the RBI for rediscount it has a usance not
exsiding 90 days. The presented for rediscount should bear at least two
 signatures. The signature of a license schedule bank is traded as a good
signature;
d) The bill of exchange arising out of a sale of commodities covered by the
selective credit control directive of the RBI have been excluded from
scope of the scheme facilitate the selective credit control and to keep a
watch on the level of out standing credit against the affected commodities;
and
e) The following types of bills are acceptable to RBI for the purpose of
rediscount;

i. Bills drawn on and accepted by the buyer banks

ii. Bills drawn on buyer and his banker jointly and accepted by them
jointly.
iii. Bills drawn on and accepted by the buyer under and irrevocable
letter of credit and certified by the buyer banks which have open the
letter of credit in the manners specified by RBI that is that the terms
and condition of the letter of credit have been duly complied with
by the seller.
iv. Bills drawn on and accepted by the buyer and endorsed by the seller
in favor of his banks and bearing a legend signed by a licensed
scheduled bank which shuld endorsed the bill, conforming that the
bills will be paid by bank three days before the date of maturity.
v. Bills drawn and accepted in the prescribed manner and discounted
by a bank at the instants of the drawee.
Where the buyer banks are not a licensed scheduled bank, the bill should
additionally bear signature of a licensed scheduled bank.

Procedure for rediscounting

eligible banks are required to apply to the RBI in the prescribed form giving
their estimated requirements for the 12 months ending oct of each year and limits
on sanction \ renewed for period of 1 year running from nov 1 to cot 31of the
following year. The RBI presents for payments bills of exchange rediscounted by it
and such bills have to be taken delivery of by the rediscounting banks against
payment, not less than 3working days before the dates of maturity of the bills
concerned. In case bills are retired before the date’s pro-rata refund of discount is
allowed by RBI.

Processing /precaution/defaults/grey areas

Credit assessment

Banks and NBFCs (the main discounting agencies) undertake a detailed

appraisal of customer and thoroughly assess is credit worthy ness before providing
the bills discounting (BD) facility.
 Regular credit limits are fixit by banks and NBFCs for individual parties for
purchase and discounting of clean bills and documentary bills separately.

This limits are renewed annually and are based on the following considerations

i. Quantum of business undertaken by the party ,that is ,turn over of inventory

ii. Credit worthiness of drawer(client)
iii. Credit worthiness of drawee and details of dishonor, if any
iv. Nature of customers industry.

Appraisal of the customer is done through several means:

1. The most important step is a careful scrutiny of the customers operations and
its financial viability for this a detailed analysis of his financial statements is
carried out.
2. Since the liability of the drawee also raised in case he accepts and dishonors
the bill credit information about the drawee is also collected the drawer is
asked to furnished a list of his purchases and their banks so that a report of
their credit risk can be compiled. This is especially easy for banks as a
confidential report can be easily routed through banking channel.
3. Banks have access to frequently published Indian banks association (IBA)
bulletins which indicates the names of unsatisfactory drawers/banks and
their recalled rates.
4. Both banks and NBFCs have built up substantial credit intelligence data
base which are constantly updated based on market information. Once a
client default he is black listed and may find it difficult to discount B/E
subsequently.

Special attention is paid to the following points while reviewing

bills discounting limits.

i. The earlier sanctioned limits are fully utilized by the client

ii. the bills were promptly paid on maturity date
iii. In case of unpaid bills funds were paid by the drawer.

Once the party is granted a bill discounting limit, the party approaches the
finance company for each and every bill for discounting.

The following documents are submitted along with the letter of request:

a) invoice
b) challen
 c) receipt of goods acknowledge by buyer
d) hundi /promissory note
e) truck receipt or railway receipt
f) post dated cheque for the into amount

While fixing the limit for bill discounting the balance sheet and profit & loss a/c
are properly analyzed and various ratios or calculated to arrive at a sound business
decision.

Dealing With Default:

The cycle of liabilities in a bill discounting transaction is as follows; the

drawee is liable to the drawer; and the drawer to the discounting agency. However
the bank/NBFCs looks mainly to its customer (drawer or drawee) for recovery of
its dues, In case of default, the discounting agency can resort to nothing and
protesting as laid down by the Negotiable Instrument Act.

Grey Areas:

There are certain features of the Indian industry which have impeded the
growth of a healthy discounting market (BD).

Participants:

Most of the customers approaching banks/NBFCs for bills discounting are SSI
(Small scale industries) units. For such enterprises, it is very difficult to undertaken
proper credit assessment.
Kite Flying:

The practice of discounting accommodation bills is know as kite flying, When

A draws a B/E on B with out there being any underlying movement of goods and
B accepts it to accommodate A, the B/E is called an accommodation/Kite bill. If A
now discounts it, he has uninterrupted use of funds for the maturity period of the
bill.

These funds are generally routed into the capital market to earn a very high
return on the due date the amount of the B/E is repaid by A. This practice has
severely stilted the genuine bill market, by imparting false liquidity to the system.

Supply Bills;

B/E drawn by supplier/contractors on Government departments is called supply

bills. These are not accepted by the Government. However contractors are able to
get them discounted with nationalized banks, If there is a default on the due date,
banks simply debit the dues to the ‘Government/c ‘. This practice depresses the
level of cash flow in the bill market because a B/E is being discounted without a
corresponding flow of cash.

Reduced Supply:

Several corporate houses and business groups do not accept B/E Drawn on
them. Accepting such bills is seen to be damaging to their pride, such attitudes
reduce the supply of bills and discourage the culture of drawing and discounting
bills.

Stamp Duties:

No stamps duties are levied on LC (letter of credit) backed bills upto 90 days.
This has resulted in a lop sided growth in the bills markets with practically no bills
being drqna for a period exceeding 90 days, The market, lacks depth.

PRESENT POSITION OF BILLS DISCOUNTING:

Financial services companies had been acting till the early nineties as bill-
brokers for sellers and buyers of bills arising out of business transactions. They
were acting as link between banks and business firms. At times they used to take ip
bills on their own account, using own funds or taking short-term accommodation
from banks working as acceptance/discount houses. They had been handling
business approximating Rs. 5,000 crores annually, Bill discounting as a fund-based
service, made available funds at rates 1 per cent lower than on ash credit finance
constituted about one-forth of bank finance.

However the bill re-discounting facility was misused by banks as well as the
bill-broker. The Jankiraman Committee appointed by the RBI which examined the
factory responsible for the securities-scam identified the following misuse of the
scheme:
Banks have been providing bill fiancé outside the consortium without informing
the consortium bankers.

 They have been drawing bills on companies and they themselves discounted
such bills to avail of rediscount facilities;
 In case where banks provided additional finance outside the consortium
arrangement by way of bill limits covering sales of goods, the sales proceeds
have been unavailable to them to provide production finance,
 Bill finance had been provided to dealers/stockiest of large manufacturing
companies without proper appraisal of their credit needs;
 Bills discounted by front companies set up by industrial groups on their
parent companies which were obviously accommodation bills were
discounted /rediscounted by banks;
 They rediscounting of bills by finance companies with banks was done at a
much lower rate of interest;
 Although bills are essentially trade documents, bills related to electricity
charges, custom charges lease rentals etc, were also discounted. This was
mainly due to the lack of depth in the bills market and NBFCs felt the need
for new instrument or schemes to increase their business.
 No records regarding bill discounting facility by banks the RBI issued
guidelines to banks in July 1992.
The main elements of these guidelines are as follows:

 No fund/non fund based facility should be provided by banks outside

the consortium arrangement;
 Bill finance shuld be a part of the working capital/credit limit;
 Only bills covering purchase of raw materials/inventory for
production purposes and sale of goods should be discounted by banks;
i. Accommodation bill should never be discounted;
ii. Bill re-discounting should be restricted to usance bills held by
other banks. The banks should not re-discount bills earlier
discounted by finance companies;
As a result there was substantial decline in the volume of bill discounting.
Presently the volumes are on an average Rs. 800 – 900 crores per year.
 BILLS RE-DISCOUNTING SCHEME

Under this scheme of IDBI the prospective purchaser-user of indigenous

machinery approaches the eligible manufacturer-seller and suggests to him that
instead of cash down payment in full for the required machinery he would prefer to
acquire it on deferred payments terms under the Bills Rediscounting Scheme of the
IDBI. If the suggestion is accepted by the manufacturer-seller the cost of
machinery excluding the advance payment is sub-divided into half –yearly or
yearly installments and separate bills or promissory notes drawn/made for each
installment plus interest in respect of deferred payments. On delivery to the
manufacturer-seller who gets them discounted with his own banker hereby
realizing the cost of the machinery. The discount payable by him to his banker is
included in the amount of the bills by way of interest for the period of deferred
payment. The banker of the manufacturer seller in turn takes the discounted bills
to the SBH and gets them rediscounted thus obtaining the amount paid by him to
the manufacturer-seller. Subsequently the discounting bank takes back the bills
from SBH against payment three working days in advance of their due dates and
obtains the payment thereof on due dates from the purchaser/guarantor of the bills.
Procedure for rediscounting:

Eligible banks are required to apply to the RBI in the prescribed form giving
their estimated requirements for the 12 months ending October of each and limits
are sanctioned/renewed for a period of one year running from November 1 to
October 31 of the following year. The RBI presents for payment bills of exchange
rediscounted by it and such bills have to be taken delivery of by the rediscounting
banks against payment not less than three working days before the dates of
maturity of the bills concerned. In case bills are retired before the date, pro-rata
refund of discount allowed by the RBI.

Eligibility Criteria for Manufacturer-Sellers

Deferred payment facilities are available to the following:

Manufactures of indigenous capital equipment/machinery of any type

including agricultural equipment and machinery:

Or

Authorized selling agents/distributors of manufacturers (foreign or local)

provided they have paid the full consideration to the machinery manufacturer
before the execution of the relative set of bills or promissory notes:
Eligibility Criteria for Buyers:-

Capital equipment/machinery can be purchased on differed payment basis by

the following:

 Purchaser-user belonging to the private sector;

 Autonomous enterprises under the state or central governments, e.g.
electricity boards, road transport corporations or manufacturing units;
 Farming enterprises not doing farming themselves but providing mechanized
services to small farmers;
 Agriculturists buying agricultural machinery/equipment;
 Selling agents/distributors/dealers of agricultural machinery and equipment
provided similar deferred payments facilities are offered by them in turn to
the purchasing farmers.

Facilities under this scheme can hence be availed by both the private and the public
sector. The actual users may belong to industrial sector as also to non-industrial
sector provided that the equipment is not applied for trading, domestic and leasing
purposes. The non-industrial commercial users can avail of these deferred payment
facilities provided the equipment is procured directly from manufactures and not
through selling agents/distributors.
Documentation for Bills of Exchange

The bills of exchange to be offered for rediscounting may be drawn either

by the purchaser on his banker vide pro forma on Annexure 11.1 by the seller on
the purchaser/purchaser’s banker vide pro forma on Annexure 11.2. The bills
covering sales by authorized selling agents/distributors of machinery
manufacturers are some what different and are covered by pro forma given on
Annexure 11.3

A separate bill has to be drawn for every installments payable under the
differed payment arrangement. The bills eligible for rediscounting must have an
unexpired Usance of not less than 6 months on the date of their lodgment with
SBH. The first installment should not fall due later than a year from the date of
dispatch of machinery or date of execution of bills, which is earlier.
 The bills, to be eligible for rediscounting, should be accepted for payment at
two alternate places, viz the office of the SBH where the bills are proposed to be
rediscounted and the corresponding office at the same location of the approved
bank tendering bills for rediscounting.

Documentation for Deferred Credits:

The ICICI insists on either acceptance/co-acceptance of usance bills or a

guarantee by commercial banks towards security gains deferred payments.

In respect of acceptance/co-acceptance of usance bills by commercial banks,

the bill must be on the prescribed format (Annexure 12.2 or 12.3). In all cases, a
certificate must also be obtained from the commercial bank on the prescribed
format (Anenexure12.4) on its letter head certifying that the person(s) signing on
behalf of the bank on the usance bills has/have the requisite authority to do so and
their signature have been duly attested.

In respect of usance bills guaranteed by commercial banks, the bill must be

on the prescribed format (Annexure 12.5)
 The under mentioned guidelines of the ICICI must also be kept in mind while
executing the usance bills and obtaining the bank guarantees:

 The interest should be rounded off to the nearest rupee.

 The bills should be payable at intervals of exactly six months.
 The guarantee must be dated on or after the date of execution of the
usance bills.

According to the Indian Negotiable Instruments Act, 1881

“The bill of exchange is an instrument in writing containing an unconditional

order, signed by the maker, directing a certain person sum of money only to, or to
the order of, a certain person, or to the bearer of that instrument.”

The bill of exchange (B/E) is used for financing a transaction in goods which
means that it is essentially a trade-related instrument.

TYPES OF BILLS:
 There are various types of bills. They can be classified on the basis of when
they are due for payment, whether the documents of title of goods accompany such
bills or not, the type of activity they finance, etc. Some of these bills are:

Demand Bills:

This is payable immediately “at sight” or “on presentment” to the drawee. A

bill on which no time of payment or “due date” is specified is also termed as a
demand bill.

Usance Bill:

This is also called time bill. The term usance refers to the time period
recognized by custom or usage for payment of bills.

Documentary Bills:

These are the B/Es that are accompanied by documents that confirm that a trade
has taken place between the buyer and the seller of goods. These documents
include he invoices and other documents of title such as railway receipts and bills
of lading issued by custom officials. Documentary bills can be further classified as:
 i. Documents against acceptance (D/A) bills and

ii. Documents against payments (D/P) bills.

D/A Bills:

In this case, the documentary evidence accompanying the bill of exchange

is deliverable against acceptance by the drawee. This means the documentary bill
becomes a clean bill after delivery of the documents.

D/P Bills:

In case a bill is a “documents against payment” bill and has been accepted
by the drawee, the documents of title are held by the bank or the finance company
till the maturity of the B/E.

Clean Bills:

These bills are not accompanied by any documents that show that a trade has
taken place between the buyer and the seller. Because of this the interest rate
charged on such bills is higher than the rate charged on documentary bills.
PURCHASE OF CLEAN BILLS

Foreign clean bills generally include personal checks drawn in foreign

currencies, foreign traveler checks dividend warrants on companies abroad etc.
they are purchased by banks and sent to foreign correspondent banks or overseas
branches for realization. All this instruments should be brought by banks only after
satisfying them self’s about their genuineness and also the credit standing of the
drawer of this instruments (bills).

1) Procedure for purchase of clean bills

a) The customer must submit an application in a prescribed form of the bank

(for discounting the bill) along with the bill.
b) The application and the bill should be scrutinized carefully to ensure there
genuine ness and correctness .if they are found in order the approval of the
appropriate officer must be obtained for discounting the bill.

2) Preparation of vouchers :

After obtaining the approval of the officer concerned the following vouchers
should be passed.
Debit:

Central office A/c or Foreign Exchange Department (correspondent or branch

abroad shadow A/c) for the ill amount.

Credit:

Customer for the bill amount less charges.

Credit:

Profit and Loss A/c – Foreign Commission for the commission charges.

3) Recording in the register :

Record the details of the bill in the Register of Remittances Lodged (Outward) as
follows

Date ……………………………………...

Ref.No…………………………………….

Particulars of bills etc……………………..

The details recorded are as under

 1 2 3 4 5 6

Date Ref.No. Particulars Drawers Drawers

Foreign currency

Of bill name and bank name

amount

Address Address

7 8 9 10 11 12

Rate of Re.eqilnt COM. and To whom Initials

Date of Exchange charges sent for
reversal

Realization

13 14 15 16 17

Credit ref.No Amount of bills Commission Amount Initial

 Collected reimbursed

4. Preparation of Collection Advice:

Complete the Foreign Bills (Clean) Collection Advice in duplicate.

(a) The instruction for accounting/remitting the proceeds is given in this

collection advice. The orginal copy is sent to the foreign bank/branch
along with the instrument, and the duplicate is retained for office
record.
(b) Some foreign banks provide printed copies of collection advice in a
carbon set. Whenever this is not available banks own form is used.
Except for the last copy which is retained by the sending bank for
 record, all other copies are sent to the collection bank along with the
instrument. Two copies of the advice are later returned to the bank
sending the instrument giving details of credit.

5. Markings to the Affixed on the Bill:

(a) the rank’s crossing stamp

(b) the Rank’s ‘round’ stamp with the Reference Number and
(c) the Rubber stamp certifying payment:

6. After attaching the bill to the original covering schedule, the bill, vouchers,
register, etc., are sent to the office for checking and signature.

If the cheques/drafts are payable at a place. Where the banks offer services
of giving immediate conditional credit banks in India should forward those
cheques/drafts to foreign correspondent for conditional immediate credit.

7. Debit vouchers should be prepared and sent to the cash department with
remark’s “Pay cash”/credit the proceeds of the Bill to the customer’s account.

8. All the copies should be fixed in serial order.

9. Purchase note is prepared and sent to the dealing section, informing the purchase
of the foreign currency.

10. Procedure on Realization of Bill:

(a) If any charges have been deducted by the collecting foreign

correspondent, calculate its rupee equivalent; recover the same amount
from the customer. The rate applicable for this purpose is the BC
Selling rate.
(b) The following vouchers are prepared (for adjustment of charges)

Debit: Customers for the amount of correspondent’s charges

Credit: Central Office or Foreign Exchange Department (Foreign

Correspondent – Shadow A/C for the amount of adjustments.

(C) The etails of payments and the adjustment effected are recorded in the
appropriate Colums against the orginal entry in the Register of
Remittance

Lodged (Outward) and the entry is rounded off to indicate its closing.

(d) The certifacte of Foreign Inward Remittance form, if requested by the

customer, is prepared. A remark to this effect is also made in the
Register.
 (e) The credit advice, vouchers (if any) and the Register are sent to the
officer for checking and signature.

(f) Office copies should be filed in serial order.

11. Procedures for collection of Foreign (Clean) Bills:

1. On receipt of the bills, it shuld be verified whether they are payable

abroad.
2. If there is a request for cash payment on realization, it shuld be
ensured that the bill is being collected for a customer of the
bank.
3. The details of the shuld be entered in the the Register of Remittance
Lodged (Outward) and obtain serial reference number.

The details recorded are as under

1 2 3 4 5 6

Date Ref.No. Particulars Drawers Drawers

Foreign currency

Of bill name and bank name

amount
 Address Address

7 8 9 10 11 12

Rate of Re.eqilnt COM. and to whom Initials

Date of Exchange charges sent for
reversal

Realization

13 14 15 16 17

Credit ref.No Amount of bills Commission Amount Initial

Collected reimbursed

Creation of a B/E:

Suppose a seller sells goods or merchandise to a buyer. In most cases the

seller would like to be paid immediately but the buyer would like to pay only after
some time that is the buyer would wish to purchase on credit, to solve this problem
the seller draws a B/E of a given maturity on the buyer. The seller has now
assumed the role of a creditor and is called the drawer of the bill. The buyer who is
the debtor is called the drawee. The seller the sends the bill to the buyer who
acknowledges his responsibility for the payment of the amount on the terms
mentioned on the bill by writing his acceptance on the bill. The acceptor could be
the buyer himself or any third party willing to take on the credit risk of the buyer.

Discounting of B/E:

The seller who is the holder of an accepted B/E has two options:

1) Hold on to the B/E till maturity and then the payment from the buyer.

2) Discount the B/E with discounting agency .Option (2) is by for more
attractive to the seller.

The seller can take over the accepted B/e to a discounting agency (bank,
NBFC, company, high net worth individual) and obtained ready cash .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 on the pace valve of the bill is called the
discount and is calculated at a rate percentage per annum on the maturity value.

The maturity a B/E is defined as a date on which payment will fall due. Normal
maturity periods or 30, 60, 90 or 120 days but bills maturing with in 90days seem
to be the most popular.