Commercial bill is a short-term, negotiable, and self-liquidating instrument with low risk. It arises out of the genuine trade transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date. It comes with a maturity of 30 days, 60 days or 90 days, depending on the credit extended in the industry.
When the bill is drawn by the seller to the buyer for the goods purchased by him, it is known as Trade Bill. When trade bill is accepted by commercial banks, it is called Commercial Bill. The bank discount this bill after deducting the interest for the remaining period of the bill and service charges from the face value of the bill. The interest rate is called the discount rate on the bills.
- Demand and Usance Bill:
A demand bill is payable on demand, that is immediately at sight or on a presentation by the drawee. It is also called Sight bill.
Usance bill or time bill is payable immediately after the expiry of time period mentioned in the bill. The period varies according to the established trade custom or usage prevailing in the country.
- Clean and Documentary Bill:
In a clean bill, documents are enclosed and delivered against acceptance by the drawee, after which it becomes clear.
In the case of a documentary bill, documents are delivered against payment accepted by the drawee and documents of the bill are filed by bankers till the bill is paid. These bills can be further classified into D/A bills and D/P bills.
In the case of D/A bills, the documents accompanying bills have to be delivered to the drawee immediately after acceptance.
On the order hand, the documents have to be handed over to the drawee only against payment in the case of D/P bills. The documents will be retained by the banker.
- Inland or Foreign Bill:
Inland bills must (a) be drawn or made in India and must be payable in India: or (b) drawn upon any person resident in India.
Foreign bills, on the other hand, are (a) drawn outside India and may be payable and by a party outside India, or may be payable in India or drawn on a party in India or (b) it may be drawn in India and made payable outside India.
- Export and Import Bill:
Export bills are drawn by exporters in any country outside India.
import bills, on the other hand, are drawn on importers in India by exporters abroad.
- Accommodation and Supply Bill:
Accommodation bills are those which do not arise out of genuine trade transactions. In the case of accommodation bills, a person accepts the bill to help the other person to meet his financial obligations. Generally, these bills are not accompanied by any document of title to goods. Banks discount such accommodation bills and money is paid to the bank on the due date.
Supply bills are generally drawn on the Government departments by contractors or suppliers for the goods supplied to them. The peculiar feature of the supply bills is that they are neither accepted by the Government departments nor accompanied by documents of title of goods. However, commercial banks lend to the holder of supply bills by creating a charge on them.
Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages:
Bills are highly liquid assets. In times of necessity, bills can be converted into cash readily by means of rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure. Moreover, they are negotiable instruments and hence they can be transferred freely by a mere delivery or by endorsement and delivery.
- Ideal Investment:
Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. For instance, commercial banks can invest their funds in bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits.
- Simple Legal Remedy:
In case the bills are dishonored, the legal remedy is simple. Such dishonored bills have to be simply noted and protested and the whole amount should be debited to the customer’s accounts.
- High and Quick Yield:
The financial institutions earn a high quick yield. The discount is dedicated at the time of discounting itself whereas, in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high.
- Easy Central Bank Control:
The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. Suitable monetary policy can be taken by adjusting the bank rate depending upon the monetary conditions prevailing in the market.
In spite of these merits, the bill market has not been well developed in India, due to its following limitations:
- Preference of Cash Credit over Bills:
Business people in India prefer O.D and cash credit to bill financing, therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular.
- An absence of Rediscounting Among Banks:
There is no practice of re-discounting of bills between banks who need funds and those who have surplus funds. In order to enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular.
- Stamp Duty:
Stamp duty discourages the use of bills. Moreover, stamp papers of the required denomination are not available.
- An absence of Secondary Market:
There is no active secondary market for bills. The rediscounting facility is available at important centers and that too is restricted to the apex level financial institutions. Hence, the size of the bill market has been curtailed to a large extent.
- Difficulty in Ascertaining Genuine Trade Bills:
The financial institutions have to verify the bills so as to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to be scrutinized carefully. It involves additional work.
- An absence of Acceptance Services:
There is no discount house or acceptance house in India. Hence, specialized services are not available in the field of discounting or acceptance.
- Limited Foreign Trade:
It is mostly foreign trade that is financed through the bills market. The size of this market is small because the share of foreign trade in national income is small. Moreover, export and import bills are still drawn in foreign currency which has restricted their scope of negotiation.
In order to develop the Commercial Bill market, RBI introduced an innovation instruments known as ‘Derivative Usance Promissory Notes,’ backed by such eligible commercial bills for required amounts and usance period (up to 90 days). The government has exempted stamp duty on such promissory notes. This has simplified and streamlined bill rediscounting by institutions and made the commercial bill an active instrument in the secondary money market. This instrument, being a negotiable instrument issued by banks, is a sound investment for rediscounting institutions.
Moreover, rediscounting institutions can further discount the bills anytime prior to the date of maturity. Since some banks were using the facility of rediscounting commercial bills and derivative usance promissory notes of as short a period as one day, the Reserve Bank restricted such rediscounting to a minimum period of 15 days. The eligibility criteria prescribed by the Reserve Bank for rediscounting commercial bills are that the bill should arise out of a genuine commercial transaction showing evidence of sale of goods and the maturity date of the bill should exceed 90 days from the date of rediscounting.