Quick Know how of BIll Discounting

Dear friends,

The Bill discounting business has always been a good source of generating income for the Bank. The facility is also beneficial for the business entities as it is a source of working capital finance for them while selling goods on credit. The facility of “Bill discount” differs from “Bill purchase” in terms of time involved in realization of proceeds. In case of “Purchase of Bills” the Bank can collect the payment immediately by presenting it before the drawee while in “Bill discounting”, the proceeds are realized after the agreed period i.e. date of maturity. That is why the charges in “Purchasing Bill” are lesser than in “Discounting the Bill” as in later case, it includes interest for period from discounting till the date of its’ maturity.  

The Banks extend Bill discounting facility as an arrangement whereby, the sellers get proceeds of sales represented by bills from the Bank, before the agreed period of payment. Normally, the discounting of bills is allowed for the Bills drawn against the Letter of Credit issued by a first class Bank.  Before extending such facility, the Bank need to ensure the legitimacy of the Bill and creditworthiness of the buyers, against whom, the bill is drawn. The word “legitimacy of the Bill”,  has to be taken in it’s broad sense and will  include:

i.   Bills presented for discount have been cross checked with terms of LC.

ii. Ensuring that underlying transactions involve actual movement of goods.

iii. Relative Invoices/ Bills are in conformity with the orders of the buyers .

iv. Bills have been received either through authorized Agents of the party or directly.

v.  Bills presented for discounting has been duly accepted by the payee.

vi. TR/LR  enclosed with Bill are from approved Transport Operators (IBA in India).

vii. Bills have been cross checked for related party transaction.

viii. The Bills evidence proper taxations.

 ix. Proper KYC with EDD has been done both on sellers & buyers.

Deviations in observance of systems  and procedure of bill discounting, if any allowed, would increase the risk associated with this business. For example laxity in verification of genuineness of underlying transactions by careful perusal of invoices/ documents, lacking CDD / EDD in respect of new customers, accepting Bills for discounting which are accompanied by transport documents prior to LC issue date despite a clear prohibition under LC. These examples are indicative only. Deviations without proper safeguard can result in a faulty business decision resulting in financial fraud and trade transaction related laundering of money.

It is also seen that the proper approval / sanction of Bill discounting limit is not done and the limits if sanctioned, are not  renewed / reviewed .at periodical intervals. Verification of LCs, against which the bills are drawn, are also need to be done, whenever or wherever required, to safeguard the Bank’s interest. Any laxity may only facilitate the efforts of the fraudsters / Money launderers to cheat the bank .

Sneh Deep Agnihotri