Bill Market Schemes

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Bill Market Schemes

The development of bill discounting as a financial service depends upon the existence of a full-fledged bill market. The Reserve Bank of India (RBI) has constantly endeavored to develop the commercial bills market. Several committees set-up to examine the system of bank financing and money market had strongly recommended a gradual shift to bills finance and phase-out of the cash credit system. The most notable of these were: (i) Dehejia Committee, 1969, (ii) Tandon Committee, 1974, (iii) Chore Committee, 1980 and (iv) Vaghul Committee, 1985. This section briefly outlines the efforts made by the RBI in the direction of the development of a full-fledged bill market.

BILL MARKET SCHEME, 1952

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
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 The confessional rate of interest was withdrawn in two stages of one quarter of one per cent each and ceased to be operative from November 1956.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, irrespective of the size of their deposits.

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:
In the case of bills of exchange and promissory notes arising out of any such transaction relating to the export of goods from India, within one hundred and eighty days;
In any other case, within ninety days from the date of purchase or rediscount
exclusive of days of grace;
The scheme is confined to genuine trade bills arising out of genuine sale of goods. The bill should normally have a maturity of not more than 90 days. A bill having a maturity of 90 to 120 days is also eligible for rediscount, provided at the time of offering to the RBI for rediscount it has a usance not exceeding 90 days. The bills presented for rediscount should bear at least two good signatures. The signature of a licensed scheduled bank is treated as a good signature
In order to revitalise the bill market scheme, several committees made recommendations in the light of experience of the operations of the scheme. On the basis of these, several measures were initiated by the n to promote bill financing. The important ones being: (1) a ceiling on the proportion of receivable (75 per cent) eligible for financing under the cash credit system, (2) discretion to banks to sanction additional hoc limits for a period not exceeding 3 months, upto an amount equivalent to 10 per cent of the existing I limit subject to a ceiling of Rs 1 crore, (3) stipulation on ratio of bill acceptance to credit purchases (25 per cent), (4) setting up of the Discount and Finance House of India (DFHI) to buy/sell/discount short-term Is, (5) reduction in the discount rate on usance bills, (6) remission of stamp duty on bills drawn on/made ‘in favour of a bank/cooperative bank. The procedure requiring the bill to the endorsed and delivered to re discounter at every time of rediscounting has been done away with. A derivative usance promissory note is issued by the discounter on the strength of the underlying bills which have tenor corresponding to, or lesser than, tenor of the derivatives usance promissory note and in any case not more than 90 days. The derivative promissory note is exempted from stamp duty.

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