Bill Discountinhg

Bill Discounting

Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pays 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 collects the total amount. If the bill is delayed, the borrower or his customer pays the Bank a pre-determined interest depending upon the terms of transaction.

In other words, Cashing or trading a bill of exchange at less than its par value and before its maturity date. The cash thus realized varies according to the number of days until maturity and the risk involved.

Types of Bill Discounting

Bill discounting basically can be divided into two categories, purchase bills discounting and sales bill discounting. A purchase bill discounting means that the investor discounts the purchase bill of the company and pays the company, who in turn pay their supplier. The investor gets his money back from the company at the end of the discounting period. A sales bills discounting means the 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

The procedure is that a broker will contact you with proposals to discount bills of different companies at different rates of discounting. The better companies command discounting rates of 13% to 15%, while the lesser known, by size and by safety, have to pay discounting rates of 17% to as high as 28%. When an investor and the company agree to a particular bill discounting transaction, the following is what the company gives to the investor. The original copies of bills to be discounted; a hundi / promissory note; Postdated cheque; the investor simply has to issue a cheque. The amount of cheque is arrived at after deducting the discount rate. The postdated cheque that the...