Discounting of bills of exchange (http://www.accountingformanagement.com/definition_and_explanation_of_bills_of_exchange.

htm) Discounting of bills of exchange is a financing transaction wherein a company remits an unexpired commercial bill of exchange to the bank in return for an advance of the amount of the bill, less interest and fees. Depending on the accounting principles and the exact form of discounting, this financing can be off or on balance sheet. Purchasing and discounting of bills of exchange is another short term method of profitable instrument of banks funds. Bills of exchange can be discounted on rebate before its due date. The rebate or discount is earning of the bank. The bills of exchange usually mature within 90 days. In case a bill, say of rupees 2000 due 90 days hence is discounted today at 20 percent per annum, the borrower is paid rupees 1900. the bank however collects the full amount of rupees 2000 of the bill from drawer on maturity. The drawer or maker of the bill is expected to pay the bill on maturity. The bank by discounting the clean or documentary bill advances the amount to the payee. On maturity of the bill the amount is collected from the drawer. The discount is the safe earning of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is dishonoured the payee is responsible to make the full payment of the bill to the bank. On the maturity of the bill there is certainly of payment to the bank. It is thus a short term advance with certainly of payment. As the date of payment to the bank is sure the short term advance is quite liquid.

BOE A bill of exchange has been defined as an unconditional order in writing addressed by one person to another; signed by the person giving it, requiring, the person to whom it isaddressed to pay on demand or at a fixed or determinable future time, a certain sum in money to or to the order of a specified person or to bearer.

Parties to a Bill of Exchange:

There are three parties in a bill:

1. 2. 3.

Drawer Drawee Payee

Specimen/Sample of a Bill of Exchange:

Stamp Amount City 1st January, 2010

Three month after date pay to Z or order the sum of [amount] only for value received To, B (Drawer) Sd.X. (Drawer) City

Advantages of B/Es The advantages of bills discounting to investors and banks and finance companies are as follows: To Investors: 1) Short term sources of finance; 2) Bills discounting being in the nature of a transaction is outside the purview of Section 370 of the Indian companies Act 1956, that restricts the amount of loans that can be given by group companies;

3) Since it is a lending no tax at source is deducted while making the payment charges which is very convenient not only from the cash flow point of view, but also from the point of view of companies that do not envisage tax liabilities. 4) Rates of discount are better than those available on ICDs and 5) Flexibility is not only in the quantum of investments but also in the duration of investments. To Banks: Safety of Funds: The greatest security for a banker is that a B/E is a negotiable instrument bearing signatures of two parties considered good for the amount of bill; so he can enforce his claim. Certainty of payment: A B/E is a self liquidating asset with the banker knowing in advance the date of its maturity. Thus, bill finance obviates the need for maintaining large, unutilized, ideal cash balances as under the cash credit system. It also provides banks greater control over their drawls.