MADE BY:

INTRODUCTION

A commercial bill is one which arises out of a genuine trade transaction,

i.e. credit 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 amount mentioned therein after a certain

specified date. Thus, a bill of exchange contains a written order from the

creditor to the debtor, to pay a certain sum, to a certain person, after a

creation period. A bill of exchange is a ‘self-liquidating’ paper and negotiable/; it is drawn always for a short period ranging between 3

months and 6 months.

Commercial bill is a short term, negotiable, and self-liquidating

instrument with low risk. It enhances he liability to make payment in a

fixed date when goods are bought on credit. According to the Indian

Negotiable Instruments Act, 1881, bill or exchange is a written instrument

containing an unconditional order, signed by the maker, directing to pay a

certain amount of money only to a particular person, or to the bearer of

the instrument. Bills of exchange are negotiable instruments drawn by

the seller (drawer) on the buyer (drawee) or the value of the goods

delivered to him. Such bills are called trade bills. When trade bills are

accepted by commercial banks, they are called commercial bills. The bank

discount this bill by keeping a certain margin and credits the proceeds.

Banks, when in need of money, can also get such bills rediscounted by

financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity

period of the bills varies from 30 days, 60 days or 90 days, depending on

the credit extended in the industry.

Hence Commercial Bill is a “Bill of exchange used in the buying and selling of goods.”Bills of exchange are negotiable instruments drawn by the

seller (drawer) on the buyer (drawee) or the value of the goods delivered

to him. Such bills are called trade bills. When trade bills are accepted by

commercial banks, they are called commercial bills. The bank discount

this bill by keeping a certain margin and credits the proceeds. Banks,

when in need of money, can also get such bills rediscounted by financial

institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the

bills varies from 30 days, 60 days or 90 days, depending on the credit

extended in the industry.

An unsecured, short-term debt instrument issued by a corporation,

typically for the financing of accounts receivable, inventories and meeting

short-term liabilities. Maturities on commercial paper rarely range any

longer than 270 days. The debt is usually issued at a discount, reflecting

prevailing market interest rates.

Bill financing is an important mode of meeting the credit needs of trade

and industry in developed economies because it facilitates an

efficient payment system being self-liquidating in nature. In India bill

financing has been popular since long in ancient Hundi´ form. The

existence of an approved bills market enables rediscounting of bills which

is a traditional instrument of credit control. As such, the Indian central

Banking Enquiry Committee (1931) had strongly recommended the

establishment of a market in commercial bills. But nothing could be done

by the Reserve Bank till 1952, on account of the war, the indifference of

British Government and the partition of the country.

The RBI pioneered effort on developing bill culture in India. It introduced

Bill Market Scheme (BMS) in 1952 to provide demand loan against

banks promissory notes supported by their constituents 90 days usance

bills or promissory notes.

The scheme was designed to ease the problem of providing temporary

finance to commercial banks by the Reserve Bank as a lender of last

resort. But, it did not succeed in developing a genuine bill market.

Finally in November 1970, based on the recommendations

of Narasimham committee, RBI introduced Bill Rediscounting Scheme

(BRS)also known as New Bill Market Scheme (NBMS) which continues till

date in modified form. Under this scheme, all scheduled commercial

banks are eligible to rediscount genuine trade bills arising out of

sale/purchase of goods with the RBI and other approved institutions.

DEFINTION OF A BILL

Section 5 of the negotiable Instruments Act defines a bill exchange a

follows:

“an instrument in writing containing an unconditional order, signed by

the maker, directing a certain person to pay a certain sum of money only

to, or to the order of a certain person ort to the beater of the

instrument”.

In other words it is an unconditional order issued by a person or business

which directs the recipient to pay a fixed sum of money to a third party at

a future date. The future date may be either fixed or negotiable. A bill of

exchange must be in writing and signed and dated. Also called draft.

FEATURES OF A BILL OF EXCHANGE

Here are some important features of a commercial bill.

1. A Bill of Exchange must be in writing

2. It must be dated

3. It must contain an order to pay a certain sum of money

4. The money must be paid to a definite person or to his order or

bearer

5. The draft must be accepted for payment by the party on whom the

order is made.

PARTIES TO A BILL OF EXCHANGE

A bill of exchange is essentially an order made by one person to another

to pay money to a third person. A bill of exchange requires in its inception

three parties—the drawer, the drawee, and the payee. The person who

draws the bill is called the drawer. The party upon whom the bill is drawn

is called the drawee. He is the person to whom the bill is addressed and

who is ordered to pay. He becomes an acceptor when he indicates his

willingness to pay the bill. The party in whose favor the bill is drawn or is

payable is called the payee. The parties need not all be distinct persons.

Thus, the drawer may draw on himself payable to his own order.

A bill of exchange may be endorsed by the payee in favour of a third

party, who may in turn endorse it to a fourth, and so on indefinitely. The

"holder in due course" may claim the amount of the bill against the

drawee and all previous endorsers, regardless of any counterclaims that

may have disabled the previous payee or endorser from doing so. This is

what is meant by saying that a bill is negotiable.

To summarize -:

i. The Drawer who prepares the bill.

ii. The Drawee in whose name the bill has been drawn.

iii. The Payee to whom the bill has to be paid.

iv. The Endorsee to whom the bill has been transferred by way of

endorsement by the payee.

TYPES OF COMMERCIAL BILL

Many types of bills are in circulation in a bill market. They can be broadly

classified as follows:

1) Demand and Usince Bills

Demand bills are others called sight bills. These bills are payable

immediately as soon as they are presented to the drawee. No time of

payment is specified and hence they are payable at sight. Usince bills are

called time bills. These bills are payable immediately after the expiry of

time period mentioned in the bills. The period varies according to the

established trade custom or usage prevailing in the country.

2) Clean Bills and Documentary Bills

When bills have to be accompanied by documents of title to goods like

Railways, receipt, Lorry receipt, Bill of Lading etc. the bills are called

documentary bills. 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. Generally

D/A bills are drawn on parties who have a good financial standing. 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. Till the payment o0f such bills. When bills are drawn

without accompanying any documents they are called clean bills. In such

a case, documents will be directly sent to the drawee.

3) Inland and Foreign Bills

Inland bills are those drawn upon a person resident in India and are

payable in India. Foreign bills are drawn outside India an they may be

payable either in India or outside India. They may be drawn upon a

person resident in India also. Foreign boils have their origin outside India.

They also include bills drawn on India made payable outside India.

4) Export Bills

Export bills are those drawn by Indian exports on importers outside India

and import bills are drawn on Indian importers in India by exports outside

India.

5) Indigenous Bills

Indigenous bills are those drawn and accepted according to native

custom or usage of trade. These bills are popular among indigenous

bankers only. In India, they called ‘hundis’ the hundis are known by

various names such as ‘Shah Jog’, ‘Nam Jog’, Jokhani’, Termainjog’. ‘Darshani’, ‘Dhanijog’, and so an.

6) Accommodation Bills and Supply Bills

If bills do not arise out of genuine trade transactions, they are called

accommodation bills. They are known as ‘kite bills’ or ‘wind bills’. Two parties draw bills on each other purely for the purpos4 of mutual financial

accommodation. These bills are discounted with bankers and the

proceeds are shared among themselves. On the due dates, they are paid.

Supply bills are those neither drawn by suppliers or contractors on the

government departments for the goods nor accompanied by documents

of title to goods. So, they are not considered as negotiable instruments.

These bills are useful only for the purpose of getting advances from

commercial banks by creating a charge on these bills.

OPERATIONS IN BILL MARKET

From the operations point of view, the bill market can be classified into

two viz.

1) Discount Market

Discount market refers to the market where short-term genuine trade

bills are discounted by financial intermediaries like commercial banks.

When credit sales are affected, the seller draws a bill on the buyer who

accepts it promising to pay the specified sum at the specified period. The

seller has to wait until the maturity of the bill for getting payment. But,

the presence of a bill market enables him to get payment immediately.

The seller can ensure payment immediately by discounting the bill with

some financial intermediary by paying a small amount of money called

‘Discount rate’ on the date of maturity; the intermediary claims the amount of the bill from the person who has accept6ed the bill.

In some countries, there are some financial intermediaries who specialize

in the field of discounting. For instance, in London Money Market there

are specialize in the field discounting bills. Such institutions are

conspicuously absent in India. Hence, commercial banks in India have to

undertake the work of discounting. However, the DFHI has been

established to activate this market.

2) Acceptance Market

The acceptance market refers to the market where short-term genuine

trade bills are accepted by financial intermediaries. All trade bills cannot

be discounted easily because the parties to the bills may not be

financially sound. In case such bills are accepted by financial

intermediaries like banks, the bills earn a good name and reputation and

such bills can readily discounted anywhere. In London, there are specialist

firms called acceptance house which accept bills drawn by trades and

import greater marketability to such bills. However, their importance has

declined in recent times. In India, there are no acceptance houses. The

commercial banks undertake the acceptance business to some extent.

ADVANTAGES OF A COMMERCIAL BILL

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:

1) Liquidity:

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.

2) Certainty Of Payment:

Bills are drawn and accepted by business people. Generally, business

people are used to keeping their words and the use of the bills imposes a