Bill Market in India

JOHN JOSE
ROLL NO: 35
 Bill Market refers to the market for short-term bills generally of three months
maturity. A bill is a promise to pay a specified amount by the borrower (drawer) to
the creditor (drawee).
 Bills are of three types-
(a) bills of exchange or commercial bills used to finance trade;. (b) finance
bills or promissory notes; and (c)treasury bills used to
meet temporary financial needs to the government.
 These bills may be bought and sold in the discount market which consists of
commercial banks, discount houses and other institutions.
Importance of Bill market

(a) It helps to meet the short-term financial requirements of individuals, companies

and the government.
(b) The commercial banks which have surplus funds can invest them profitably in
these bills,
 (c) The commercial bank can dispose of these bills easily or can get them
rediscounted by the Reserve Bank of India whenever they require cash.
Types of Bill Market Scheme

 Old Bill Market Scheme

 New Bill Market Scheme
Old Bill Market Scheme

The bill market scheme was introduced by the Reserve Bank of India in January 1952.
Under this scheme, the Reserve Bank undertook to advance loans to commercial banks
against their demand promissory notes supported by the security of usance bills of their
constituents or customers.
 Before 1952, the practice was that the banks could secure additional cash from the
Reserve Bank only by selling government securities to it.
 But, now, according to the bill market scheme, a bank can grant loans to its
customers against their promissory notes and can further use the same promissory
notes to borrow from the Reserve Bank. All that the bank is required is to convert
these promissory notes into usance promissory notes maturing within 90 days. Thus
the bill market scheme aimed at widening the loan window of the Reserve Bank for
the banks by allowing them to borrow even against their ordinary commercial credit
after its conversion into eligible bills.
Initially, the bill market scheme was introduced on an experimental basis. It was
restricted (a) to the scheduled banks with deposits of Rs. 10 crore and above- (b) for the
loans with the minimum limit of Rs. 10 lakh; and © against the individual bills, the
minimum value of each should be one lakh rupees.
 Later on the scope of the scheme was broadened from time to time- (a) by making
more banks eligible to borrow under the scheme; (b) by reducing the minimum
eligibility value for bills- (c) by reducing the minimum limit of advances; and (d) by
extending the scheme to export bills with the minimum usance of 180 days. Soon the
bill market scheme became popular. The loans granted under the scheme increased
from Rs. 29 crore in 1951-52 to Rs. 228 crore in 1955-56 and to Rs. 1354 crore in
1968-69.
 The Dehajia Committee report brought out the abuses of cash system and suggested
the use of bill financing for the supervision of the funds lent by the commercial banks.
New Bill Market Scheme

Dissatisfied with the old bill market scheme, in February 1970, the Reserve Bank of
India constituted a Study Group under the chairmanship of Sh Narasimhan to go into
the question of enlarging the use of bills of exchange as an instrument of credit and
the creation of genuine bill market in India.
 On the recommendations of the report of the study group, the Reserve Bank
introduced the New Bill Market Scheme in November 1970 under Section 17 (2)
of the Reserve Bank of India Act.
Main features of the New Bill Market
Scheme
All licensed scheduled commercial banks including the public sector banks will be eligible to offer bills of
exchange to the Reserve Bank for rediscounting.
 The bills covered under the scheme must be genuine trade bills relating to the sale or dispatch of goods.
 The Reserve Bank rediscounts these bills. That is why the scheme is also called ‘Bills Rediscounting
Scheme’. The rediscounting facility should be available at the Reserve Bank’s offices at Bombay,
Calcutta, Madras and New Delhi. To avoid rediscounting of large number of small bills, such bills
should be given in bunches.
 The bill should be drawn on and accepted by the purchaser’s bank. If the purchaser’s bank is not a
licensed scheduled bank, the bill should in addition bear the signatures of a licensed scheduled
bank.
 The bills should have maximum usance of 90 days.
 The bills should bear at least two good signatures.
 The scheme does not cover the bills of exchange relating to the sale of goods to the government
departments and quasi-government bodies as well as to statutory corporations to the sale of such
commodities which are indicated by the Reserve Bank from time to time
Advantages of Developed Bill Market

 Bill finance is better than cash credit. Bills are self-liquidating and the date of repayment
of a bank’s loans through discounting or rediscounting is certain.
 Bills provide greater liquidity to their holders because they can be shifted to others in the
market in case of need for cash.
 A developed bill market is also useful to the banks is case of emergency. In the absence of
such a market, the banks in need of cash have to depend either on call money market or on
the Reserve Bank’s loan window.
 The commercial bill rate is much higher than the treasury bill rate. Thus, the commercial
banks and other financial institutions with short-term surplus funds find in bills an
attractive source of both liquidity as well as profit.
 A development bill market is also useful for the borrowers. The bills are time-bound, can
be sold in the market and carry the additional security in the form of acceptor’s signature.
Therefore, for the borrowers, the cost of bill finance is lower than that of cash credit.
Defects of Bill Market Scheme

The scheme has been generally used by the banks and their borrowers to offset the credit control
measures of the Reserve bank. Whenever the Reserve Bank tried to control the bank credit without
restricting the bill rediscounting facility, the banks increasingly utilized this facility. This made the
Reserve Bank’s tight money policy ineffective. As a result, the Reserve Bank was forced first to
put restrictions on the bill rediscounting facility, and then to allow the facility wholly on its
discretion.
The bill market scheme has not been successful in developing a genuine bill market. The main
reason is that the borrowers as well as the banks still have preference for cash credit and dislike for
bill finance.
 The scheme is restricted to banks and some selected financial institutions. It has not been able
to cover the indigenous bankers and other constituents of unorganized sector of the Indian
money market
 The scheme has remained mainly concentrated in the fields of industry, trade and commerce. It
has not been extended to agricultural sector.
Conclusion

The evolution of the bill market will also make the Bank Rate variation by the
Reserve Bank a more effective weapon of monetary control as the impact of any such
changes could be transmitted through this sensitive market to the rest of the banking
system.