BILLS DISCOUNTED

Learning Objectives:

To understand different types

of bills

To understand the meaning of

bills purchase and discounting

3. To understand the advantages

of bills discounting

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• 7.1 Introduction

• Bills purchase and discounting is another way oftaking an advance from the bank. Such advancesare short-term and self-liquidating in nature.

• Often when goods are sold, as opposed tomaking payment in cash or by cheque,the buyerdraws a bill of exchange instructing the buyer tomake payment to the Bank processing thedocuments or to a third party.

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• 7.2 DEFINITION

• A bill of exchange is “an instrument in writingcontaining an unconditional order, signed bythe maker directing a certain person to pay acertain sum of money to, or to the order ofcertain persons or to the bearer of theinstrument” ( Section 5 of the NegotiableInstruments Act)

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• 7.3 TYPES OF BILLS OF EXCHANGE

• The bills of exchange are classified into:

• (a) Sight or demand bills and

• (b) Usance bills

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• (a) Sight or demand bills

• When a bill is payable at ‘sight’ or ‘ondemand’ or ‘on presentation’, it is called ademand bill.

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• (b) Usance bills

• If a bill matures after a certain period of time ( after 30, 60,90 or 160 days) after date or after sight it is called an usance bill.

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• Bills may also be :

• (a) Documentary bills or

• (b) Clean bills

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• (a) Documentary bills

• When the seller (drawer) of a bill encloseswith/attaches to the bill the documents oftitle to goods such as railway receipt or motortransport receipts to be delivered to the buyer(drawee of the bill) on payment or againstacceptance of the bill as the case may be, thebill is called a documentary bill.

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• (b) Clean bills

• If the bill of exchange is on its own and thereare no documents attached to it, the bill iscalled a clean bill. A clean bill also arises outof trade transactions where the relevantdocuments of title to goods are sent directlyto the drawee.

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• When the creditor or the seller of the goods draws a bill on the debtor or the buyer, he has options to deal with the bill:

• To send the bill for collection through a bank, or

• To sell it to, or discount it with, a bank

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• COLLECTION OF BILLS:

• When a seller sells goods he can sell them oncollection. The seller would draw a bill andthen hand the bill to the banker to collect theamount due from the buyer. The banker actsas the agent of the drawer and makes itspayment to him only on realization of thebill.

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• 7.5 PURCHASE AND DISCOUNTING OF BILLS

• In purchase and discounting of bills, the bankercredits the customers account with the amountof the bill after deducting his charges or discount.

• As demand bills are repayable on demand thebanker is entitled to demand their paymentimmediately on presentation before the draweeas there is no maturity period. Demand billsdiscounting is known as purchase of bills.

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• In case of an usance bill maturing after a period oftime, the banker retains the bill for that period andrealizes the amount of the bill from the drawee on itsdue date. This practice is called discounting of the bill.

• The discount is charged by the banker at a higher ratethan the charge made in case of purchase of a bill.

• The discount includes not only the expenses incurredin realization of the bill but also the interest on theamount of the bill credited to the drawers account.

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• The banker acts as an agent of his customer while collecting or negotiating bills with relevant documents.

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• In Keshari Chand vs Shillong BankingCorporation, the Supreme Court held that “The banker is bound to act according to thedirections given by the customer, and in theabsence of such directions, according to theusage prevailing at the place where thebanker conducted his business and applicableto the matter in hand.” The banker is alsobound to use reasonable skill and diligence inhis work.”

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• The position of the discounting banker as owneror agent of the customer was considered byMadya Pradesh High Court in Dena Bank vs M.P.National Textiles Corporation Ltd and held “ ifthe bills and the relevant documents presentedby its drawer are accepted by a banker with theendorsement in its favor and the same areimmediately discounted by the banker withoutwaiting for its collection, by giving full credit forthe entire amount of the document, sopresented, the banker itself becomes apurchaser and the holder hereof for full value.

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• 7.7 ADVANATGES OF DISCONTING OF BILLS

(a)Safety of bank funds

(b)Certainty of payment

(c) Facility of the refinance

(d) Stability in the value of the bill

(e) Profitability

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• 7.8 DRAWEE BILLS

• Bills of exchange discounted by banks fall into two categories:

• (a)Drawer bills

• (b)Drawee bills

• The basic difference between the two is that in case of the former, the bill is discounted at the instances of the drawer and in case of the later; at the instance of the drawee.

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• The drawer bills are also called sales bills.They finance receivables and replace cashcredit against book debts.

• The drawee bill, on the other hand, financepurchase of raw materials.

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• 7.9 ACCOMODATION BILLS

• An accommodation bill is quite similar to a billof exchange but it is distinguished from anordinary bill by the fact that such a bill is notsupported by any consideration ortransaction. The drawer does not give anyconsideration to the drawee.

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• The party lending his name to oblige theother party is known as the accommodationor accommodating party and the party beingobliged is known as accommodated party.The accommodating party is not liable to theaccommodated party on the instrument asthere is no consideration and the instrumentwas drawn only to help the accommodatedparty. But the accommodating party is liableto the ‘holder for value’.

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• The practice of discounting accommodation bills are known as kite flying

• As there is no underlying trade transaction, accommodation bills should not be discounted.

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Next Chapter 8 ‘Bank Guarantees

and Bid Bonds’