COMMERCIAL BILLS MARKET AND BILL REDISCOUNTING SCHEMES (BRS)

Commercial Bill or Bill of Exchange: Nature and Types

A bill of exchange is a written instrument containing an unconditional order, signed by the maker (called drawer), directing a certain person (called drawee) to pay a certain um of money specified in the instrument, only to, or to the order of, a certain person (called payee), or to the bearer of the instrument on demand or at the expiry of a specified period. Bill of exchange is a negotiable instrument. Its ownership changes conveniently through negotiation and endorsement in the course of its circulation. It is a ‘self liquidating’ paper. Its liquidity is next only to cash, call loans, and treasury bills, in that order. Bills prepared and discounted after proper documentation possess adequate legal safeguards also. The security increases tremendously if a bill is accompanies by a bankers acceptance.

Various types of bills of exchange are in circulation. Demand bills or sight bills are those which are payable immediately on presentation to the drawee. Usance bills or time bills are payable on the date specified on the bill or immediately after the expiry of time period mentioned in the bills.

Bills can also be classified as ‘clean bills’ and ‘documentary bills’. When the bills are accompanied by documents of title to the goods such as railway receipt (R/R), good receipt (G/R) or bill of lading, they are known as documentary bills. In case documents accompanying the bill are to be delivered against acceptance of the bill by the drawee (D/A), it becomes a clean bill immediately after acceptance and delivery of documents. When it is a ‘documents against payment’ (D/P) bill, then even after the acceptance of the bill by the drawee, the bill and the documents of title to the goods are held by the banker till the bill matures and the payment is made by the drawee.

Inland bills are (a) drawn or made in India, and are payable in India, and (b) drawn on any person who is resident in India. It may b endorsed in a foreign country or it may remain in circulation in foreign countries. Even if a bill if drawn in a foreign country, it is an inland bill if it is drawn on a person resident in India. Foreign bills include (a) bills drawn outside India and payable in India by a party outside India, and (b) bills drawn outside India and payable outside India by a person resident in India, and (c) bills drawn outside India and payable outside India by a person not resident in India and (d) bills drawn in India but made payable outside India. Bills can also be classified as export bills-drawn by exporters on a party outside India, and import bills-drawn on importers in India by exporters outside India.

In addition, there are indigenous bills of exchange and promissory notes, known as ‘hundis’ for financing agriculture and inland trade. These were handled by various types of indigenous bankers.

Bills of exchange may arise due to genuine trade or commercial transactions of purchase and sale etc., in which case they may be called genuine trade bills. Bills may be created by the borrowers and lenders simply to help each other, without any trading transaction backing the bills. These bills are called accommodation bills or kite bills or wind bills. When two parties draw bills on each other for creating instruments which they can discount from their respective bankers, and thus meet their financial requirements, these are accommodation bills. Thus, an accommodation bill can be defined as one where an accommodating party accepts the bill by putting his name to accommodate another person to help him tide over his temporary cash mismatches, without receiving any consideration. Accommodation bills are also raised when payments are not coming promptly or the buyer does not accept the documents as normally happens in the case of government supplies. A bill drawn by a supplier or contractor on the government or semi-government department for the supplies made to such departments is ‘supply bills’. These bills are not accompanied by documents of title to the goods supplied. They are also not 'accepted’ by government departments. As such, these bills do not enjoy status of a negotiable instrument. But the supplier can obtain advance from commercial banks against such bills and meet his financial needs pending payments from the government department. These bills are not negotiable instruments. Therefore, advances by banks against supply bills are clean advances.

Process of Bill Writing and Discounting

A genuine trade bill comes into existence when a seller Mr. X sells goods to buyer Mr. Y. In many cases X would need money on completion of sale while y would like to payout of earnings of his purchases. To satisfy the requirements of both X (drawer/creditor) draws a bill of agreed maturity on Y (drawer / debtor) who accepts the bill, thus acknowledging his liability to pay on due date. After this X can take the accepted bill to his bank for discounting within his sanctioned limit, or to an NBFC for outside consortium discounting and receives ready cash in return.

The difference between bill value of the sale transaction and the amount received by the drawer X is known as discount charge, which is calculated at a rate per cent per annum on the maturity value. The act of discounting is normally not interpreted as a borrowing on the security of the bill. It is an act of selling the bill, i.e., if on due date the acceptor does not pay the bill, then generally it 1s between the discounting party and the drawee to sort out between themselves. Normally recourse to the drawer of the bill is not taken.

The practice in India is that the banks when they discount bills, they hold it as a security and in case of non-payment by the drawee they take recourse to the drawer. Banks get double enforcement rights, i.e. against the drawer and also against the drawee, in case of non-payment of bills.

Bill’s become more secure and can be discounted, at extremely fine rates, if they are accepted by the drawees banker. In developed markets there are acceptance houses who, after due diligence, give acceptance for a fee, thereby imparting greater security to the bill.

Derivative Usance Promissory Notes (DUPN)

With a view to reducing physical movement of bills and facilitate multiple rediscounting, the RBI introduced an instrument called Derivative Usance Premissory Note (DUPN). This avoids the need for physical transfer of bills. , The bank that originally discounts the bills only draws DUPN. The DUPNs are sold to investors in convenient lots of maturities from 15 days upto 90 days on the basis of genuine trade bills discounted by the discounting bank.

Importance of Commercial Bill Market

Commercial Bill Market is important for trade and industry and also for the development of money market in the following ways:

(i) Bill financing is a prevalent method of meeting credit needs of trade and industry.

(ii) Commercial bills are self-liquidating in character because they have a fixed tenure.

(iii) Commercial bills have high level of liquidity-next only to cash, call loans and treasury bills. They can be easily discounted.

(iv) Use of commercial bills as an instrument of credit imposes financial discipline on the borrowers, as its payment must be made on the due date of the bill.

(v) Banks, can meet their short-term liquidity requirements but rediscounting these bills.

(vi) Existence of a bill market enables banks and other financial institutions to invest their surplus funds profitably by selecting appropriate maturities.

(vii) An efficient bill market imparts flexibility to the money market by evening out liquidity in the banking system. .

Characteristics of a Developed Bill Market

A developed bill market should possess the following characteristics:

(i) There should be large number of transactions supported by genuine trade bills.

(ii) Practice of borrowing against commercial bills should be well-established and well-spread.

(iii) Supply of commercial bills in money market should be continuous and sufficiently large.

(iv) Both borrowers and lenders must subject themselves to strict financial discipline.

(v) Commercial banks should use bill of exchange as an instrument for providing credit to their customers.

(vi) The market should have abundant facilities for rediscounting the bills i.e. there should be a well-developed secondary market for commercial bills.

(vii) There should be high velocity of circulation of bills, i.e. they should be discounted and rediscounted larger number of times.

(viii) The central bank should be ready to rediscount bills throughout the year.

(ix) There should be facility for 'acceptance' of bills by commercial banks, other financial institutions, or acceptance houses (as in a number of developed countries) at low cost. This considerably reduces the risk of default.

(x) There should be adequate number of intermediaries who operate with fine margin and help smoothen functioning of bill market.

(xi) There should be efficient credit investigating agencies to investigate into the creditworthiness of different parties.

Weaknesses of Indian Bill Market or Why Indian Bill Market Remained Underdeveloped

Despite some growth during the last decade, Indian bill market continues to be underdeveloped due to the following reasons:

(i) There has been a reluctance on the part of trade and industry and government departments to move towards a bill culture which requires observance of strict financial discipline, particularly on the part of borrowers.

(ii) There has been a need to affix stamp on each bill. Stamp papers of required denomination are not available many a times.

(iii) Services of specialised credit investigating agencies were earlier totally missing.

(iv) Absence of an active secondary market, as the rediscounting has been permitted only with the apex level financial institutions, curtailed the size of bill market.

(v) There have been administrative problems like physical scrutiny of invoices accompanying bills to ensure that they are trade related, physical presentation of bills for repayment, requirement of physical endorsement and re-endorsement of bills at the time of rediscount.

(vi) The bill acceptance service in commercial bill market has been very much restricted.

(vii) Rediscounting facility is available only at Bombay. Calcutta. Delhi, Madras, Ahmedabad. Bangalore. Hyderabad. Nagpur. Kanpur and Patna.

(viii) In developed countries bill market was established mainly for financing foreign trade. In India, foreign trade as percentage to national income has always remained small and so the size of bill market.

(ix) Indian government has entered into trading activity in a big way through public sector units like STC, MMTC, FCI etc. The government does not prefer financing its activities through commercial bills.

(x) Approach of commercial banks is reflected in their following behaviour:

(a) Commercial banks prefer purchasing bills, rather than discounting them.

(b) Major part of bills discounted by banks are not genuine trade bills. They are created by converting cash credit and overdrafts of their customers.

(c) In many cases bill financing by banks is of the nature of loans against the security of bills, rather than in the form of purchase or rediscounting of bills.

(d) Banks are shy of rediscounting bills with other commercial banks having excess liquidity so that bill market does not fully serve the purpose of evening out liquidity in the banking system. Now larger number of institutions, in addition to commercials banks, e.g., LIC, UTI, GIC, ICICI, Nabard, SIDBI, IFCI and DFHI etc., are participating in bill market.

(e) Banks have a tendency to hold purchased or discounted bills till the completion of their maturity period. This reduces the velocity of circulation of bills and acts as a constraints in the expansion of bill market.

The popularity of bill of exchange as a credit instrument and as a money market instrument depends on maintenance of financial discipline and shiftability of bills. The shiftability of bills depends on the availability of acceptance services and credit rating services and the readiness of the central bank to supply credit to the money market during period of shortages. A number of steps have been taken form time to time to activate and expand bill market in India.

Growth of Commercial Bill Market in India

Bill financing has been population in India since long in ‘hundi’ form. The market was small and unorganized as it was dominated by indigenous bankers. Recognising the fact that the instrument of bills is a keystone of a well developed and active money market, the Reserve Bank of India (RBI) in 1952. Under the scheme scheduled commercial banks were provided demand loans against bank’s promissory notes supported by their constituents’ 90 days usance bills or promissory notes. The banks were also allowed to convert part of their advances, loans etc., into usance promissory notes for purposes of loading these with the RBI as collateral. Initially the BMS was restricted to banks with deposits of at least Rs. 10 crore, then extended in 1953 to banks with deposits of at least Rs. 5 crore, and was further extended in July 1954 to all licensed scheduled banks. Initially advances were made by the RBI at concessional rates. But by November 1956 the concessions were withdrawn. Initially, the minimum limit of advance was fixed at Rs. 25 lakh and that of individual bill at Rs. 5 lakh. These limits were gradually reduced to Rs. 5 lakh and Rs. 50,000 respectively by February 1957. In October 1958, the BMS was extended to cover export bills so that banks could

allow credit facilities to exports on a more liberal basis. Despite these efforts the BMS could not make headway in developing bill culture.

Bill Rediscounting Scheme/New Bill Market Scheme

In 1968, the Daheja Committee reiterated that commercial banks, industry and trade should develop the practice of issuing usance bills which should have discounting facilities. The Study Group chaired by Shri M. Narasimham emphasized in 1970 that progressive use of the bills as an instrument of credit would be advantageous not only form the point of view of imposing financial discipline on borrowers but also on lenders.

On November 1, 1970, the RBI on recommendations of Narasimham Committee, introduced the bill Rediscounting Scheme (BRS) which is also known as New Bill Market Scheme (NBMS). This scheme continues till now with time to time modifications.

Objectives of BRS

The objectives of BRS are as follows:

(i) Creation of an instrument of credit linked with the genuine transactions of purchase and sale;

(ii) Creation of an instrument of credit which encourages a more disciplined use of bank credit than that practiced under usual cash credit and book debt loan;

(iii) Creation of a money market instrument for evening out liquidity in the banking system;

(iv) Developing a subsidiary market in commercial bills and making the money market more deep and wide; and

(v) Creation of an instrument which banks could get rediscounted with other financial institutions.

Bills Eligible for Rediscount

Under the BRS scheme, all scheduled commercial banks are eligible to rediscount the eligible bills with the RBI and other approved institutions. The bill eligible (B/E) for rediscount has to satisfy the following conditions:

(i) It should be a genuine trade bill, i.e., it should arise out of a genuine transaction of purchase and sale.

(ii) The nature of the transaction and the particulars of the documents of title to goods relating to the transaction should be indicated on the face of the bill.

(iii) The bill has to be drawn on, and accepted by the purchaser’s licensed scheduled bank.

(iv) In case the purchaser’s bank is not a licensed scheduled bank the bill has to, in addition bear an endorsement of a licensed scheme bank

(v) Joint bills, i.e., the bills drawn on the buyer and his bank jointly and bills jointly accepted, are also eligible for rediscounting.

(vi) Eligible bill should have usance of not more then 90 day. In exceptional cases, where the bill has usance up to 120 days, it can be rediscounted only if the remaining maturity period does not exceed 90 days at the time of its presentation for rediscounting.

(vii) The bill should have at least two good signatures, one of which has to be of a licensed scheduled bank.

(viii) Bill arising out of sale of commodities covered by the RBI under selective credit controls, are not eligible for rediscounting.

(ix) Bills drawn by textile mills, and traders and dealers in textiles are eligible for rediscount provided usance of bill does not exceed 60 days.

(x) Bills drawn on customers within the same business group are eligible for rediscounting provided the drawer and the drawee are separate legal entities.

(xi) Bills arising out of sale of goods to government departments, semi-government organisation, statutory corporations and government companies are also eligible for rediscounting provided all conditions under the scheme are satisfied.

(xii) Initially, the minimum amount of single bill was fixed at Rs. 5000 and the minimum limit of a single advance was fixed at Rs, 50000. These limits were done away with since November 1971 because banks are, since then, not required to lodge bills with the RBI or other institutions

for purposes of rediscounting. However, a single bill to be eligible cannot be a value less than Rs. 1000.

(xiii) Banks enjoy refinance facilities against commercial bills throughout the year.

(xiv) Multani and accommodation bills are not eligible for rediscounting.

Lodging of Bills with the RBI

In the beginning, at the time of rediscounting of bills, the banks were required to lodge all such bills with the RBI. This involved lot of work by the banks and the RBI at the time of lodging and taking these bills back, delays and hastes regarding custody of bills. To minimize these difficulties, the RBI has dispensed with the requirement of lodgement of eligible bills up to face value of Rs. 10 lakh. Banks keep these bills in their possession as agents of the RBI even after their rediscounting. Reserve Bank has now permitted banks to issue derivative usance promissory notes on the strength of the underlying bills.

It means that the bills discounted by the banks remain with them. On the basis of their holding of such bills, they draw derivative promissory note in favour of another bank/institution for a period not more than 90 days. The promissory note becomes the basis for securing re-discounting facility from other institutions. On the due date the drawer banker makes payment to the other banker or institution.

Why New Bills Market Schemes (NBMS) or Bill Rediscounting Scheme (BRS) had Slow Success?

Despite attempts by the RBI the NBMS failed to expand at the desired pace due to the following reasons:

(i) Indian businessmen have shown reluctance in accepting financial discipline implicit in the BRS which requires firm commitment for payment on majority date.

(ii) Many big businessmen, particularly monopolists in an item regard it against their prestige to accept bills.

(iii) NBMS had limited coverage as it excluded sensitive commodities covered by the selective credit controls by the RBI (barring textiles),

(iv) Supplies to government departments were not initially covered, though, the coverage of NBMS was extended to them in July 1971.

(v) Very poor response of public sector undertakings of NBMS, though they had occupied commanding heights in the economy.

(vi) Restriction of permitted limit of credit under the scheme to 90 days also limits the scope of NBMS. In certain trades, e.g., wholesale textile business, normal credit period is 6 months to 9 months.

(vii) Application of NBMS for all practical purposes, is confined to the rediscounting centres alone due to operational difficulties.

(viii) Small businessmen find it difficult to get bills accepted by banks. This is an essential requirement under the scheme.

(ix) Credit rating agencies were also non existent before the setting up of CRISIL and ICRA.

(x) Commercial banks generally did not rediscount bills with other commercial banks but approached straight to the RBI whenever there was urgent need to funds and/or bill rediscounting proved cheaper than call loans. The RBI, thus, acted as the lender of the first resort rather than the lender of last resort.

(xi) Stamp duty on bills and non-availability of stamp papers also led to tardy progress of NBMS. Later stamp duty was removed.

Recent Measures for Activating Bill Market

Chakraborty Committee (1985) emphasized the need to develop bill market and the conceptual frame work for the same was examined by Vaghul Working Group (1987). The group opined that development of self-liquidating trade and commercial bills should be given overriding importance and hurdles in the system should be overcome early. The group had a firm belief that promotion of bill culture among trade and industry would activated the market, provided initiative is taken by government, public sector enterprises and large business houses. The group re commended as set of measures for activating bill market which can b briefly stated as follows:

(i) The government should direct departmental and other public sector enterprises to make payments for all credit purchases through bills, which should be honoured on the due dates. Default should attract a penal rate of 2 per cent over the maximum lending rates. Limits should be reduced after three successive defaults.

(ii) Working capital limits of large enterprises should be scaled down and simultaneously the interest rates should be increased if bill acceptances are less than the stipulated percentage of credit purchases.

(iii) Attempt should be made to move away form receivable financing to bill financing so that by March 1990, financing through cash credit/overdrafts gets reduced to 25 per cent.

(iv) Bill limits for CAS parties should be increased temporarily at the discretion of banks.

(v) Bill financing should not be subjected to the stipulation of unsecured advances.

(vi) The maximum discount rate on bills should not exceed effective interest rate of 16 per cent. Of course, the ultimate objective should be to settle for market-determined interest rate structure.

(vii) The ceiling on the rediscount rate should be increased from 11.5 per cent to 12.5 per cent. Ultimately, the ceiling should be removed.

(viii) Only those companies, institutions, trusts, etc., should be allowed to participate in the bill market which have a resource surplus of Rs. 5 core or more, on a regular basis.

(ix) Rediscounting procedure should be simplified and it should be freely permitted.

(x) Banks should ask their big clients (those enjoying working capital limit of Rs. 6 crore) to pay for their credit purchases through bills.

(xi) Banks should streamline their operations in regard to the conduct of bill limits so as to achieve a greater financial discipline.

Following the recommendation of Vaghul Group various steps were taken for enlarging and activating the bill market:

(i) The RBI lowered the ceiling rate of interest on advances form 17.5 per cent o 16.5 per cent and later to 15.5 per cent. The RBI fixed the interest rate on bills one percentage point below the new maximum lending rate.

(ii) The ceiling on rediscount rate was increased form 11.5 per cent to 12.5 per cent with a view to attracting market players with surplus funds, such as UTI, LIC etc., to the bill market.

(iii) With effect from April 1, 1988, the RBI advised the banks that only 75 per cent of the receivables would be eligible for the drawing power on cash credit/overdraft facility. The remainder 25 per cent is to be met through demand usance bills.

(iv) Only July 23, 1988 the government waived stamp duty on usance bills of exchange subject to the following conditions.:

(a) They are payable not more than 90 days after date or sight.

(b) They are drawn on or made by or in favour of a commercial bank or a co-operative bank,

(c) They arise out of a genuine commercial or trade transaction.

(v) For developing the secondary market in bills by simplifying the procedures and documentation involved in rediscounting the bill, the RBI, since September 1988, introduced the innovation of a derivative usance promissory note to be issued by the discounter on the strength of underlying bills with a tenor corresponding to or less than the tenor of the derivative usance promissory note and in any case not more than 90 days. The derivative promissory note was exempt form stamp duty. Proforma for facilitating successive rounds of rediscounting was also specified.

(vi) Setting up of DFHI, in April 1988, as a premier money market institution was a leap forward in promoting secondary market in bills.

DFHI’s operations in commercial bills have increased at a fast rate sine its inception. DFHI offers two-way quotes for buying and selling rediscounted bills. Since it gets refinance from the RBI, it is able to finance adequate resources in case of need.

(vii) The RBI has enlarged the list of participants in the bill market Institutions approved for rediscounting bills include: 91) all commercial banks, (2) LIC and its subsidiaries. (3) GIC and its subsidiaries, (4) DFHI, (5) UTI, (6) ICICI, (7) IRBI, (8) ECGC, (9) NABARD, (10) IFCI, (11) NHB, (12) SCICI, (13) IDBI, (14) EFCI, (15) Exim Bank, (16) MSCB, (17) SIDBI, (18) Select UCBs, (19) SBI Mutual fund, (20) Canbank Mutual Funds, (21) LIC Mutual Fund, (22) Punjab National Bank Mutual Fund, etc.

(viii) Commercial bill rediscounting rates were totally freed w.e.f. May 1, 1989.

(ix) The endorsement and delivery of bill at the time of rediscounting was done away with, facilitating multiple rediscounting and imparting greater liquidity to bills.

(x) Drawee bill scheme was promoted for securing prompt payment to the small-scale units.

(xi) ‘Bill’ Finance for Settlement of Dues of SSI Suppliers. Earlier, in the interest of developing ‘bills’ culture in the system, banks were advised that, out of total inland credit purchases of the borrowers, not less than 25 per cent should be through bills drawn on them by concerned sellers. However, the scheme had not developed and some of the corporates were not keen on bill finance. SSI units supplying goods to corporates have been complaining that their dues are not promptly settled by the corporates, with the result, their manufacturing activities suffered.

With a view to ensure prompt settlement of dues of SSI units, as also encouraging ‘bills culture’, banks have been advised to ensure that with effect from January 1, 1998, of the total inland credit purchases of the borrowers, not less than 25 per cent should be through bills drawn on them by concerned sellers.

The RBI has, thus, taken a number of steps to revive the bills market. A minimum 25 per cent of bank limit are by way of bills, stamp duty on bills of upto 90- day usance and discounted through bank has been waived, and a number of new players have been permitted to participate in the rediscounting market giving it greater depth and liquidity. Despite all these efforts, the bill culture has not really picked up in India. This is mainly due to lack of supply of quality bills and also because the government and public sector units are important buyers. The continued insistence of the banks to treat bills only as a security, and the availability of alternate, less cumbersome and cheaper means of finance have also restricted the growth of the bill market.

Bills rediscounting market witnessed lower activities during 1997-98. Total amount of bills rediscounted by Scheduled Commercial Banks (SCBs) with the financial institutions, mutual funds and the Primary Deals (PDs) decreased from Rs. 1029 crore in end-March 1997 to Rs. 286 crore by end-March 1998 and then increased to Rs. 408 crore by end-August 1998.

Rediscounting Procedure by Banks

Commercial banks are allowed to draw derivative usance promissory notes for maturities up to 90 day on the strength of commercial bills discounted by their branches. In case of original discounting the discounter bank issues the derivative usance promissory note in favour of the bank/other approved institutions with which the bills have been discounted. The discounting bank holds such unencu bered usance bills till the date of maturity of its own derivative usance promissory note. As the bills mature during the currency of the derivative promissory note, the drawer banks should ensure that these bills get deleted form the cover, and are replaced by fresh eligible bills so that the overall cover remains intact.

The function of rediscounting of bills and drawing derivative promissory notes is centralized with the bank’s main fund management centre so that effective control can be exercised on this activity and the benefits of specialization are also achieved. The discounting bank maintains a register containing true and complete details of usance bills held in support of derivative promissory notes issued by it. The rediscounting bank also issues a certificate to the rediscounter bank/approved institution certifying holding of unencumbered commercial bills of adequate value. The RBI’s directives regarding operation of bill rediscounting are as follows:

(i) Rediscounting in excess of eligible bill will be treated as unsecured borrowing.

(ii) Bills discounted by non-bank financial companies should not be rediscounted by banks.

(iii) Only usance bills held by other banks can be rediscounted.

(iv) Finance companies cannot avail of rediscounting facilities.

(v) Bill financing is art of fund-based limits. Accommodation bills cannot be rediscounted.

(vi) Only those bills which arise due to purchase of raw materials or inventory for production purposes and sale of goods can be discounted.

(vii) Bills which cover payment of electricity charges, custom duties, lease rent installment, hire purchase, sale of securities, etc, cannot be discounted.

Bills Market Rates

Bill Market rates which have remained historically relevant form time to time for determining the cost of bill finance are:

(a) Bazar bill rate, i.e., the rate at which shroffs and other-money-lenders used to discount bills of small traders;

(b) SBI hundi rate, i.e., the rate at which the SBI used to discount

hundis of indigenous bankers;

(c) Commercial banks’ bill finance rate, i.e., the rat of which commercial banks can get bills discounted from each other;

(d) SBI discount rate, i.e., the rate at which the SBI discounts first class usance bills;

(e) Bank rate, i.e., the rate at which the RBI rediscounts eligible bills from commercial banks;

(f) DFHI rate, i.e., the rate at which the DFHI buys and sells eligible bills from commercial banks and other approved institutions. The DFHI quotes both the buying and the selling rates.

Many of these rates stopped being available long time back. The SBI discount rate increased from 8.5 per cent in 1970-71 to 16.5 per cent in 1975-76. After that it declined to 13 per cent in 1980-81, rose again to 17.5 per cent in 1985-86 and fell down to 15.5 per cent in 1987-88 after which the DFHI started quoting buying and selling rates for commercial bills.

There had also been a lot of fluctuations in discount rate. For example the DFHI’s bid rat was 14 per cent in January 1991 and had touched a high of 25 per cent in November 1991. Towards the close of 1995-96 the DFHI buying rate was 16.5 per cent and on May 16, 1996 it was 15.5 per cent. Discount rates declined sharply in second half of 1996 and during 1997-98. During October 1997 till the announcement of the credit policy on October 21, DFHI was discounting commercial bills at 10.50 per cent. Discount rate fell further after that in tune with the overall decline in interest rates.

Computation of Yield

A usance promissory note for bill rediscounting is issued at a discount, i.e., the discount is realized at the time of rediscounting. Such discount can be reinvested. Thus the yield to the buyers of bills if more than the discount rate. The yield can be calculated with the help of the following formulas:

Actual Yield = [(1 + . R . )p – 1 ] x 100 100 x P

Where R = Rate of discount per annum

P = Period of compounding in one year, e.g., if it is a 3 months bill, then period of compounding is 12 months/3 months = 4 or 365/ no. of days.

For example, if it is a 3 months bill and the discount rate is 15.5 per cent then yield will be as follows:

Yield = [(1 + . 15.5 . )12/3 – 1 ] x 100 100 x 12/3

= [(1.03874)4 – 1] x 100

= (1.1642442 – 1) x 100

= 16.4244 per cent

Importance of BRS in Funds Management

Commercial bills discounting has the merit of high degree of safety and liquidity. The instrument can be used both by the borrow and the lender for efficient fund management.

BRS is helpful to commercial banks in overcoming various problems associated with providing credit through cash credit system. Financing through BRS offers many benefits to bank over granting cash credit in that: (i) bills have a definite maturity date, (ii) in case the bill is dishonoured the penal provisions of the Negotiable Instrument Act are attracted, (iii) two good signatures on the bill including that of a bank minimize the risk, (iv) it ensures in a better way that the credit is used only for the purpose for which it has been obtained, (v) banks can meet their cash requirements by rediscounting the bills with the RBI, DFHI, etc., and (vi) bill finance ensures better turnover of funds facilitating fuller utilization of resources of banks.

Moreover, borrowings by commercial banks under BRS are not treated as liability for NDTL purpose. But these are reduced from the credit portfolio of the borrowing bank. Liability side of the bank remains unaffected. It merely results in

switch over of its assets. Thus the banks are saved of the obligation of maintaining higher liquidity reserves on borrowing through BRS.

To the lender of funds – discounter banks or other institutions – lending by rediscounting of derivative promissory note is very safe and highly liquid. The repayment on due date is assured. These notes can be rediscounted. Due to the DFHI’s practice of regularly offering two-way quotes, there is a well-developed secondary market in bills. In case the discounter is a scheduled commercial bank, then the amount lent is adjusted against liabilities of the banking system reducing its NDTL

In addition, if there is a developed bill market, the bank rate variations become a more effective weapon of monetary control because the impact of changes in the bank rate will influence the entire banking system through a sensitive and efficient bill market.