The salient features of the scheme were as follows:
The scheme was announced under Section 17(4)(c) of RBI Act which enables it to make advances to scheduled banks against the security of issuance of promissory notes or bills drawn on and payable in India and arising out of bona fide commercial or trade transaction bearing two or more good signatures one of which should be that of scheduled bank and maturing within 90 days from the date of advances;
The scheduled banks were required to convert a portion of the demand promissory notes obtained by them from their constituents in respect of loans/overdrafts and cash credits granted to them into usance promissory notes maturing within 90 days to be able to avail of refinance under the scheme;
The existing loan, cash credit or overdraft accounts were, therefore, required to be split up into two parts, that is:
one part was to remain covered by the demand promissory notes, in this account further withdrawals or repayments were as usual being permitted;
the other part, which would represent the minimum requirement of the borrower during the next three months would be converted into usance promissory notes maturing within ninety days.
This procedure did not bring any change in offering same facilities as before by banks to their constituents. Banks could lodge the usance promissory notes with RBI- for advances as eligible security for borrowing so as to replenish their loanable funds.
The amount advanced by the RBI was not to exceed the amount lent by the scheduled banks to the respective borrowers.
The scheduled bank applying for accommodation had to certify that the paper presented by it as collateral arose out of bona fide commercial transactions and that the party was creditworthy.
The RBI could also make such appropriate enquiries as it deemed fit, in connection with eligibility of bills and call for any further information from the scheduled banks concerned.
Advances to banks under the scheme, in the initial stages, were made at one-half of one per cent below the bank rate. The confessional rate of interest was withdrawn in two stages of one quarter of one per cent each and ceased to be operative from November 1956.
As a further inducement to banks, the RBI agreed to bear half the cost of the stamp duty incurred in converting demand bills into time bills.
In the initial stages the minimum limit for an advance which could be availed of from the RBI at any time was fixed at Rs 25 lakh and the individual bills tendered for the purpose were not to be less than rupee one lakh. Subsequently, however, the scheme was liberalised and the minimum amounts were reduced from Rs 25 lakh to Rs 10 lakh (reduced further to Rs 5 lakh in February 1967) and from Rs I lakh to Rs 50,000. The scheme, which was initially, restricted to licensed scheduled commercial banks having deposits (including deposits outside India) of Rs 10 crore or more was later extended to all licensed scheduled commercial banks, irrespectiveof the size of their deposits.
The scheme virtually ceased to function in 1970. The main reasons being:
Lack of specialised institutions for discharging the functions of acceptance and discount houses;
Paucity of usance bills-both domestic and foreign;
Traders found cash credit facility conveniently available from banks and avoided usance bills as an instrument of credit;
Export bills were negotiated by banks under letters of credit opened by foreign importers and foreign correspondent banks;
Banks got refinance against declaration of export bills from RBI Exim-Bank when needed;
Lack of practice of discounting the bills with other banks having excess liquidity;
Criteria for creditworthiness of the traders was not evolved to avoid risk of defaults of redemption on maturity of the bills.
Bill Market Scheme, 1970
In pursuance of the recommendations of the Dehejia Committee, the RBI constituted a working group (Narsimham Study Group) to evolve a scheme to enlarge the use of bills. Based on the scheme suggested by the study group, the RBI introduced with effect from November 1, 1970, the new bill market scheme in order to facilitate the re-discounting of eligible bills of exchange by banks with it. To popularise the use of bills, the scope of the scheme was enlarged, the number of participants was increased, and the procedure was simplified over the years. The salient features of the scheme are as follows:
Eligible Institutions All licensed scheduled banks and those which do not require a licence (i.e. the State Bank of India, its associate banks and natioanlised banks) are eligible to offer bills of exchange to the RBI for rediscount. There is no objection to a bill accepted by such banks being purchased by other banks and financial institutions but the RBI rediscounts only such of those bills as are offered to it by an eligible bank.
Eligibility of Bills The eligibility of bills offered under the scheme to the RBI is determined by the statutory provisions embodied in section 17(2)(a) of the Reserve Bank of India Act, which authorise the purchase, sale and rediscount of bills of exchange and promissory notes, drawn on and payable in India and arising out of bona fide commercial or trade transactions, bearing two or more good signatures, one of which should be that of a scheduled bank or a state co-operative bank and maturing: