Financial services companies had been acting till the early nineties as bill-brokers for sellers and buyers of bills arising out of business transactions. They were acting as link between banks and business firms. At times they used to take up bills on their own account, using own funds or taking short-term accommodation from banks working as acceptance/discount houses. They had been handling business approximating Rs 5,000 crores annually. Bill discounting, as a fund-based service, made available funds at rates I per cent lower than on ash credit finance and bill finance constituted about one-fourth of bank finance.
However, the bill re-discounting facility was misused by banks as well as the bill-brokers. The Jankiraman Committee appointed by the RBi which examined the factors responsible for the securities-scam identified the following misuse of the scheme:
They have been drawing bills on companies and they themselves discounted such bills to avail of rediscount facilities;
In cases where banks provided additional finance outside the consortium arrangement by way of bill limits covering sales of goods, the sales proceeds had been unavailable to them to provide production finance;
Bill finance had been provided to dealers/ stockiest of large manufacturing companies without proper appraisal of their credit needs;
Bills discounted by front companies set up by industrial groups on their parent companies which were obviously accommodation bills were discounted/ rediscounted by banks;
The rediscounting of bills by finance companies with banks was done at a much lower rate of interest;
Although bills are essentially trade documents, bills related to electricity charges, custom charges, lease rentals etc. were also discounted. This was mainly due to the lack of depth in the bills market and NBFCs felt the need for new instrument or schemes to increase their business.
No fund/non-fund based facility should be provided by banks outside the consortium arrangement;
Bill finance should be a part of the working capital credit limit;
Only bills covering purchase of raw materials/inventory for production purposes and sale of goods should be discounted by banks;
Accommodation bill should never be discounted;
Bill re-discounting should be restricted to usance bills held by other banks. The banks should not rediscount bills earlier discounted by finance companies;
Funds accepted by banks for portfolio management should not be deployed for discounting bills.