Bill Discounting: The use of bank funds in discounting bills is considered as a highly
earning liquid asset. A bill of exchange is said to have discounted when there is a
liability to meet the bill should the same be dishonoured and only the amount of the
bill is received in advance after deduction of discounting charges. Bills are generally
of two types. One is demand bills and the other is usance bills. Demand bills are
repayable on demand and there is no maturity. The banker can demand payment
from the drawee on presentation. Usance bills have a certain period of maturity and
the bank has to retain the bill till due date and realise the amount on due date. This
practice is called discounting of bills. When the bill is purchased or discounted, the
banker credits the customer’s account with the amount of the bill after deducting his
charges or discount.
The banker then gets the full amount of bill of maturity or on demand. It is an
important method of lending. The advantages of bill discounting are safety of bank’s
funds, certainty of payment, facility of refinance, stability in the value of bill and
profitability. Reserve Bank of India has permitted the banks to rediscount the bills
with one another as well as with approved financial institutions such as LIC, UTI,
ICICI, ECGC, etc.
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