Bill Discounting, as a fund based activity. According to Indian negotiable act 1881, “The 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 the certain person, or to the bearer of that instrument.
Bill discounting is an asset-based financial service. The aspect of bill discounting covered include its advantages and disadvantages. Bill markets schemes, procedures and processing,post-securities scam position, and some grey-areas.The main points also summarised.
Creation of Bill discounting
Suppose a seller sells goods or merchandise to a buyer who 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 buyer who is the debtor called the drawee. The seller then sends the bill to the buyer. The buyer 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 bill of exchange
The seller,who is the holder of an accepted B/E has two option.
1)Hold on to B/E till maturity and then take the payment from the buyer.
2)Discount the B/E with a discounting agency.
The margin between the ready money paid and the face value of the bill called the discount and calculated at a rate percentage per annum on the maturity value.
Types of Bill
Bill classified in the basis of when they are due for payment.following are the type of bill.
1)Demand bill-This is payable immediately the drawee, when “due date” or time not specified on bill .such a type of bill called demand bill.
2)Usance bill-When time period recognized by custom or usage for payment of bills that is a usance bill also called time bill.
3)Documentary bills-When trade takes place between a buyer and the seller of goods.B/E accompained by the documents that contain included invoices and railway receipts, lorry receipts, and bill of lading issued by customs officials.
Advantage of bill discounting
The advantage of bill discounting to investors and banks and finance companies are as follows.
1)Short-term sources of finance.
2)Bills discounting being in the nature of transaction is outside the purview of section 370 of the Indian Companies Act 1956. It restricts the amount of loans that can be given by group companies.
3)Since it is not a lending, no tax at source deducted while making the payment charges which is very convenient. Not only from a 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
5)Flexibility, not only in the quantum of investments but also in the duration of investments.
Factoring V/S bill discounting
Factoring should be distinguished from bill discounting. Bill discounting or invoice discounting consists of the client drawing bills of exchange for goods and services on the buyer. Discounting it with a bank for a charge,like factoring, bill discounting is a method of financing.
Bill discounting has the following limitation in companies to factoring.
i)Bills discounting is a sort of borrowing while factoring is the efficient. Specialized management of book debts along with enhancing the client’s liquidity.
ii)The client has to undertake the collection of book debt. Bill discounting is always ‘with recourse’ and as such the client not protected from bad-debts.
iii)Bills discounting is not a convenient method for companies having a large number of buyer. Small amounts since it is quite inconvenient to draw a large number of bills.