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January 23, 2011

Bill Discounting

Bill discounting as a fund-based activity emerged as a profitable business in the early nineties – However post scam its importance has declined (restrictions by RBI)


Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction.


Demand Bill: Payable immediately “at sight” or “on presentment” to the drawee. Bill on which no “due date” is specified is also termed as a demand bill.

Usance Bill: (time Bill) - Bill of exchange drawn on a term governed by the usage in that trade. Usance refers to the time period recognized by custom or usage for payment of bills.

Documentary Bills: B/Es that are accompanied by documents that confirm that a trade has taken place. documents include the invoices and other documents of title such as railway receipts, lorry receipts and bills of lading.

Further classified as:

(i) Documents against acceptance (D/A) bills - documentary evidence accompanying B/E is deliverable against acceptance by drawee.

(ii) Documents against payment (D/P) bills - In case a bill is a “documents against payment” bill and has been accepted by the drawee, documents of title will be held by bank till maturity of B/E.

Clean Bills: not accompanied by any documents that show that a trade has taken place. Thus interest rate charged on such bills is higher than rate charged on documentary bills.


Suppose a seller sells goods to a buyer. In most cases, the seller would like to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity on the buyer.

Seller (creditor) ---Drawer of bill


seller then sends the bill to the buyer who acknowledges his responsibility for the payment of the amount by writing his acceptance on the bill.


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 take the payment from the buyer.

2. Discount the B/E with a discounting agency. (more attractive)

The seller can take over the accepted B/E to a discounting agency and obtain ready cash.

(known as discounting the B/E)

The margin between the ready money paid and the face value 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 the date on which payment will fall due.


Bills discounting is of two types

1. Purchase bills discounting - investor discounts the purchase bill of the company and pays the company, who in turn pay their supplier. investor gets his money back from the company at the end of the discounting period.

2. Sales bill discounting - investor discounts the sales bill of the company and pays directly to the company. The investor gets his return from the company at the end of the discounting period.

* Procedure

Broker will contact you with proposals to discount bills of different companies at different rates. better companies command discounting rates of 13% to 15%,while lesser known have to pay discounting rates of 17% - 28%.

On agreement of particular bill discounting transaction company gives to the investor the following:

ü The original copies of bills to be discounted;

ü hundi / promissory note; Post dated cheque.

The investor simply has to issue a cheque - amount arrived at after deducting the discount rate.

EX. Company A wants to discount its purchase bill of Rs200,000 for three months. Investor P agrees to do so at a discount rate of 21%.

Investor will issue a cheque of Rs189, 500. (200,000 x 21% x 3/12)

company on its part will issue a post-dated cheque of Rs200,000 for three months period.

He gets the interest element at the first day of issuing the cheque. i.e. he does not include that part in his cheque amount. Thus he can earn interest on this interest for a three-month period. Even a simple bank fixed deposit on it will earn @5% p.a. By investing Rs189,500 for three months, the investor earns Rs10,500 on it. A return of 22.16%.

* Discount Rates The rates depend on the following factors:

Broker - His relations with the company and the investor do make a difference of a couple of percentage point in discounting rates.

Liquidity - Liquidity crunch in the market tends to hike up the rates even in the best of the companies.

Volume/Value of Discounting - When the volume/value of discounting done by the investor is high, he is looking at security more than returns. The company on its part is looking at savings by way of reduced legal paper work and a higher amount of dedicated funds .

Frequency - regular bills discounter may get upto 1% to1.5% points higher interest rates than a new investor. investor trying out with a new company and will agree to a lesser rate to ensure safety.

1 comment:

  1. Three types of discounts are offered in any business, trade, and sales. Also there are also the same in Accounting terms.


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