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.
Purchasing and discounting of bills of exchange is another short term method of profitable instrument of banks funds. Bills of exchange can be discounted on rebate before its due date. The rebate or discount is earning of the bank. The bills of exchange usually mature within 90 days. In case a bill, say of rupees 2000 due 90 days hence is discounted today at 20 percent per annum, the borrower is paid rupees 1900. the bank however collects the full amount of rupees 2000 of the bill from drawer on maturity. The drawer or maker of the bill is expected to pay the bill on maturity.
The bank by discounting the clean or documentary bill advances the amount to the payee. On maturity of the bill the amount is collected from the drawer. The discount is the safe earning of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is dishonoured the payee is responsible to make the full payment of the bill to the bank. On the maturity of the bill there is certainly of payment to the bank. It is thus a short term advance with certainly of payment. As the date of payment to the bank is sure the short term advance is quite liquid.
Business activities across borders are done through letter of credit. Letter of credit is an instrument issued in the favor of the seller by the buyer bank assuring that payment will be made after certain timer frame depending upon the terms and conditions agreed, it could be either sight, 30 days from the Bill of Lading or 120 days from the date of bill of lading. Now when the seller receives the letter of credit through bank, seller prepares documents and presents the same to the bank.
The most important element in the same is the bill of exchange which is used to negotiate a letter of credit. Seller discounts that bill of exchange with the bank and gets money. Discounting bill terminology is used for this purpose. Now it is seller's bank responsibility to send documents and bill of exchange to buyer's bank for onward forwarding to the buyer for the acceptance and the buyer finally, accepts bill of exchange drawn by the seller on buyer's bank because he has opened that LC. Buyers bank than get that signed bill of exchange from the buyer as guarantee and release payment to the sellers bank and waits for the time span will buyer will pay the bank against that bill of exchange.
There are two types of bill discounting: ·Import bill discounting. ·Export bill discounting. Import bill discount is a kind of short-term finance offered by the bank to the importer according to his demand upon receiving the bills under the letter of credit and the import collection items. They have the following virtues: 1.Reduce the funding occupied. 2.Grasp the market opportunity. While export bill discounting is financing of money in transit supplied by the bank. The virtues for export bill discounting are: 1.Accelerate the funding circulation. 2.Improve the cash flow. 3.Save the financial expenses. For more details click on link Bill Discounting.
The discount is given on the basis of the plan whatever they mention for eg50+20% means not 70%it means first 50% discount of the main cost and after that 20 % of that cost which meet after the 50 % discount
