REDISCOUNTING BILLS

PRESENTED BY ADITYA

GURPREETUTKARSH

& SRESHTHA

WHAT IS REDISCOUNTING OF BILLS ??• Rediscounting of

commercial bills is an activity involving bills • where a financial institution

rediscount • un-matured discounted

commercial bills• with another financial institution

by rediscounting.

It is a way of financing among financial

institutions.

Person with Commercial Bill

BANK

PERSON GOES TO BANK FOR DISCOUTING OF BILL

RBI / BANK

BANK REDISCOUNTS WITH ANOTHER BANK OR RBI

PROCESS OF REDISCOUNTING OF BILLS

WHAT IS THE DIFFERENCE BETWEEN

DISCOUNTING AND REDISCOUNTING?

BILL REDISCOUNTING BILL SCHEME

• In 1968 ,The Dahejia Committee • commercial banks , industry and trade• develop the practice of issuing • bills which 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 advantageous not onlyfor imposing financial discipline on borrowers but also on lenders.

New Bills Rediscounting Scheme introduced was

expected to impart flexibility to the Money Market, even

out liquidity within the banking system and enable

the Reserve Bank to exercise more effective control over

the money market.

ON NOVEMBER 1,1970

OBJECTIVES OF BRS SCHEMECREATION OF AN INSTRUMENT WHICH

ENCOURAGES MORE DISCIPLINED USE OF BANK CREDIT

PROVIDES LIQUIDITY IN BANKING SYSTEM

IS GENUINE FOR SALE AND PURCHASE TRANSACTIONS

BILLS ELIGIBLE FOR REDISCOUNT

UNDER THE BRS SCHEME , ALL SCHEDULED COMMERCIAL BANKS ARE ELIGIBLE TO

REDISCOUNT THE ELIGILE BILLS WITH THE RBI OR THER INSTITUION

CONDITIONS FOR ELIGIBILITY

GENUINE TRADE BILL

NATURE ON TRANSACTION INDICATED ON FACE OF BILL

USANCE NOT MORE THAN 90

DAYS

ACCEPTED BY PURCHASER’S

LINCENSED BANK

COMMODITIES OF RBI ARE

NOT ELIGIBLEM

SHOULD HAVE TWO GOOD

SIGNATURES , ONE OF BANK

REDISCOUNTING PROCEDURE BY BANKS

• COMMERCIAL BANKS ARE ALLOWED TO DRAW DERIVATIVES USANCE PROMISSORY NOTES FOR MATURIRTES UP TO 90 DAYS ON THE STRENGTH OF COMMERCIAL BILLS DISCOUNTED BY THEIR BRANCHES.

• THE FUCTION OF REDISCOUNTING OF BILLS AND DRAWING DERIVATIVES PROMISSORY NOTE IS CENTRALISED WITH THE BANK’S MAIN FUND ACTIVITY FOR EFFECTIVE CONTROL.

•REDISCOUNTING BANK ISSUES CERITFICATE TO THE BANK OF WHOSE BILLS IT HAS REDISCOUNTED CONTAINING ACKMOWLEDGEMENT AND VALUE

RBI’S DERIVATIVES REGARDING BILL REDISCOUNTING• REDISCOUNTING IN EXCESS OF ELIGIBLE BILL WILL BE

TREATED AS UNSECURED BORROWING.• ONLY USANCE BILLS HELD BY OTHER BANKS CAN BE

REDISCOUNTED.• FINANCE COMPANIES CANNOT AVAIL THIS FACILITY.• BILLS DISCOUNTED BY NON-BANKS SHOULD NOT BE

REDISCOUNTED BY BANKS.• ACCOMMODATIONS BILLS CANNOT BE REDISCOUNTED.

LODGING OF BILLS WITH RBI• IN THE BEGINNING , AT THE TIME OF REDISCOUNTING OF BILLS , THE BANKS WERE REQUIRED TO LODGE ALL SUCH BILLS WITH RBI.•THIS INVOLVED A LOT OF WORK.•TO MINIMIZE THESE DIFFICULTIES , THE RBI HAS DISPENSED WITH THE REQUIREMENT OF LODGING OF ELIGIBLE BILLS UP TO FACE VALUE OF RS. 10 LAKH.

SO BANKS NOW KEEP THE BILLS EVEN AFTER REDISCOUNTING WITH THEM AS AGENTS OF RBI . ON DUE DATE PAYMENT IS MADE.

RBI ASKS BANK TO KEEP THE REDISCOUNTED BILL

WITH ITSELF ONLY

AS AGENT OF RBI BANK COLLECTS MONEY ON MATURITY FROM THE

BANK IT HAD BOUGTH.

REASONS FOR SLOW SUCCESS

RELUCTANCE LIMITED COVERAGE

POOR RESPONSE BY PUBLIC SECTORS

LIMITATION OF 90 DAYS

BILL MARKETS RATE• SBI HUNDI RATE – RATE AT WHICH SBI USED TO

DISCOUNT HUNDIS OF INDEGENOUS BANKERS.•COMMERCIAL BANKS RATE – THE RATE AT WHICH

COMMERCIAL BANKS GETS BILL DISCOUNTED WITH EACH OTHER.• SBI DISCOUNT RATE – RATE AT WHICH SBI DISCOUNTS

FIRST CLASS USANCE BILLS.•BANK RATE – RATE AT WHICH THE RBI DISCOUNTS

ELIGIBLE BILLS FROM COMMERCIAL BANKS.

[(1+R/(100xP))P - 1] x 100

COMPUTATION OF YIELD DISCOUNT IS REALISED AT THE TIME OF

REDISCOUNTING , SUCH DISCOUNT CAN BE REINVESTED.

R = RATE OF DISCOUNT PER ANNUMP = PERIOD OF COMPUNDING PER ANNUM SO IF IT IS A 3 MONTH BILL THEN PERIOD OF COMPOUNDING IN 12/3 =4

IMPORTANCE OF BRS IN FUNDS MANAGEMENT

•DEFINITE MATURITY PERIOD.• IF DISHONOURED , PROVISIONS FOR PENALTY ARE ATTRACTIVE•TWO GOOD SIGNATURE MINIMISES THE RISK.•BETER WAY OF USING CREDIT•BANKS CAN MEET THEIR MEET THEIR FUNDS REQUIREMENTS BY DISCOUNTING WITH RBI

SUMMARY WE ALL LEARNED TODAY

• MEANING OF REDISCOUNTING• HOW IT CAME IN INDIA• OBJECTIVES AND ELIGIBILITY OF BRS SCHEME• REDISCOUNTING PROCEDURE BY BANKS• LODGING OF BILLS WITH RBI• REASON FOR SLOW SUCCESS• BILL MARKET RATES• COMPUTATION OF YIELD• IMPORTANCE OF BRS IN FUNDS MANAGEMENT.