Bills purchased & Discounted?
Define Bill of Exchange? Discuss different types of Exchange?
Ans. As per section 5 of negotiable Instrument Act 1881, a bill of exchange is “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, to the order of a certain person or to the bearer of the instrument”
Different types of bill:
i). Demand bill: When a bill is payable “at sight” or “on demand” or “on presentation” it is called Demand bill.
ii). Usance bill: When a bill is payable on maturity, say after 30, 60 or 90 days or after sight it is called Usance bill.
iii). Clean bill: When a bill is not accompanied with documents of title is called Clean bill.
iv). Documentary bill: When the drawer of a bill encloses the documents of title of goods, such as, Railway Receipt, or Bill of lading, the bill is called a documentary bill. Such as bill may D/A (Document against acceptance) bill or D/P (Document against payment) bill.
What are the advantage & disadvantage of purchase & discounting?
a). Certainty of payment: In case the banker takes due precautions in selecting his customers, he is almost certain of getting the payment of bills on the due dates.
b). Safety of funds: The safety of banks fund are safe because of double security. Drawee is liable to pay the bill & in case his failure, banker can recover the money from customer.
c). Employment of funds for a definite period: Since the bill are drawn for a definite period, the baker by making a judicious selection of bills can invest his surplus funds for the period he considers appropriate.
d). Refinance facility: The banker can obtain refinance facility from the approved financial institutions of the country in respect of bills discounted & purchased.
e). No fluctuation in price: Bills are better than other securities because they do not fluctuate in their value.
f). Higher yield/return: The discounting of bills gives a higher rate of return than loans and cash credits even when the rate of interest is uniform.
i). There are risk of fake bills having been issued.
ii). Parties may helps each other by accommodation bill.
iii). In case of clean bill, there is possibility of failure to realize money.