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Report of the Working Group on Discounting of Bills by Banks

Executive Summary

Preamble
Bill Financing - Historical Perspective
Bill Financing - Key Issues
Alternatives to Bill Financing
Banker’s Acceptance
Bill Financing - Services Sector
Challenges of e-Commerce

Preamble

1.0Financing post-sale operations against bill of exchange is always considered beneficial from the bankers’ point of view since bills represent the receivables stage of the operating cycle of a commercial activity, short term in tenor, self liquidating in nature, provide credit enhancement through acceptance by the drawee, a third party, and offer liquidity to the bank through re-discounting window. However, in the Indian Banking scenario, for decades now, Cash Credit/Overdraft continues to be the preponderant style of working capital funding. While Cash Credit constitutes about 70% of the total bank credit, bill finance is barely at around 10% of total bank credit. Further, bill financing is historically associated with movement of tangible goods and did not cover in its ambit the various types of activities in the services sector, though they arose out of commercial transactions. Services sector is transforming the economic profile of the country and is poised to register tremendous growth and contribute significantly to the overall economy in terms of wealth creation. It is against this backdrop that the Reserve Bank of India constituted a Working Group in December 1999 to examine the possibility of strengthening the existing bill discounting mechanism and extend its scope to services sector in view of the latter’s growing importance.

1.1The terms of reference of the Group are: -

a.To examine the feasibility and suggest measures to strengthen the existing bill discounting mechanism as an instrument for facilitating financing, in particular trade and services sectors, including discounting of Trade bills against letters of credit opened by banks.

b.To examine the role and scope for introducing “Bankers’ Acceptance” facility.

c.To examine all critical and relevant issues including the necessary safeguards to be put in place before extending Bills discounting to new areas like services and introduction of “Bankers’ Acceptance” facility.

d.Any necessary changes in the existing legal/regulatory frame work that may be needed.

e.Any other issue relevant/incidental to the subject which the Group considers necessary.

1.2The Group had extensive interactive meetings with trade associations/ Chambers of Commerce like, Federation of Indian Chambers of Commerce and Industry, ASSOCHAM, Bombay Chamber of Commerce and Industry, Indian Merchants’ Chamber, Bengal Chamber of Commerce, Federation of Karnataka Chambers of Commerce and Industry, Greater Mysore Chamber of Commerce and Industry etc., at various centres like Delhi, Mumbai, Calcutta and Bangalore and also with select corporates at Chennai.

The Group, through separate structured questionnaire, elicited the views of customers and bankers on various issues pertaining to bill finance. It also had the benefit of the suggestions of banks at a meeting held under the aegis of Indian Banks’ Association (IBA) and had the benefit of the views of IBA as well in this regard. Thus based on the responses received to the questionnaire, the views that emerged during interaction with the trade associations, corporates and banks and the findings of the sub-groups, the Group finalised its report.

Bill Financing - Historical Perspective

2.0Commercial Bill, which had its origin in Europe is an early medieval financial innovation evolved over centuries - from a personal bond executed by debtor before a Court or a public notary to its present form of a commercial financial instrument - acquiring at various stages of evolution its distinctive characteristics of easy transferability and negotiability, and thus lending itself to discounting by banks to provide liquidity to the...
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