You may sanction a bank loan against supply bills. Here we provide a detailed procedure of bank loan against supply bills. The Government, Semi-Government, Autonomous Bodies, and corporations are the largest purchasers of goods, articles, or materials.
Before effecting the purchase of some goods and materials in bulk they call for tenders from the enlisted contractors for supply. The tendered, whose tender has been accepted, enters into a contract for the supply of the contract. When supply is made he is entitled to receive payment there against.
What are the Supply Bills?
In this case, the supplier dispatches the goods/materials through Rail (R/R), Steamer (S/R), or by roads. Sometimes supply is made locally through challans.
When the supply is made by Railways or Steamer etc, the numbers and dates of the R/R’s, S/R’s, etc. are noted in their bills. Moreover, before dispatch of the goods, they are inspected by an official of the parties to whom the supply is made.
On being satisfied, these inspectors issuers a note which is called an inspection note certifying that the goods are as per terms of the contract. After the goods have been supplied according to the order, the supplier draws a bill for the agreed value along with inspection notes.
Sometimes the supply is made locally when the receiving party, on receipt of the goods, signs one copy of the challan signed by the receiver is called receipted challan. The bill for local delivery is accompanied by receipted challan.
Similarly, the contractor undertakes to perform contract work for Government or Semi-Government institutions as per the latter’s specification. He also prepares bills on completion-part or whole-of the contract and gets an inspection note from the concerned department certifying the extent of work done by him.
These bills of the suppliers and the contractors are known as Supply Bills
The bills in both these cases are passed for payment by an appropriate authority after the goods supplied or contract is completed wholly or practically as per terms and conditions of supply/contract.
Normally, it takes some time to process a bill in the government or Semi-Government departments and, hence, these suppliers/contractor s approach banks for accommodation to bridge the gap from the date of supply to the date of payment by the departments. Advances are allowed against the security of such bills on the production of evidence of supply of goods or part/whole of the completion of the contract work.
Procedure of Collection
The R/R, S/R, or the bill of landing for the relative goods is sent directly by the supplier/contractor to the relative department and the bill for the amount is sent for collection through banks empowering them either by a Power of Attorney or an endorsement on the bill to receive payment from the concerned department.
The bills are accompanied by inspection notes approving the quality and quantity of the goods or, by the necessary receipted challans or, passing certificated indicating that the goods have been actually received and accepted by the government department.
For evidencing the supply of goods, the bill should contain the number of R/R, S/R, or bill of landing sent to the concerned department. In the case of contract work, an inspection note from the concerned department certifying the extent of work done by the contraction is accompanied.
Precautions and Checks
1. Advances against supply bills require careful handling and, slight negligence may involve the lending bank in an irreparable loss. Advances against supply bills should, therefore, be confined to first-class parties who are not only honest and reliable but also have enough business experience and familiarity with the working of ht government departments concerned.
2. The original contract which authorizes the contractor to supply goods to the Government should be scrutinized and the attested copy thereof is to be kept in the bank’s file. This will give the banker an idea of the amount and size of the transactions, the period within which the goods have to be supplied/contract completed, the rates accepted by the department, and other terms of the contract. Strict compliance with the borrower of these conditions will be necessary.
3. An irrevocable Power of Attorney should be executed by the borrower in favor of the bank and the same should be registered with the particular department authorizing the bank to receive payment on behalf of contractors/suppliers in all cases whether the bills are sent directly to the purchaser or through the bank. Usually, while registering the power of attorney, the Government absolves itself of any responsibility in case the amount of the bill is paid directly to the supplier. It does happen at times that the amount is inadvertently sent directly to the supplier instead of the banker. The banker relies on the integrity of the customer and also takes a formal letter from him with an undertaking to pay to the banker any amount received by him directly from the Government.
4. The bill must be accompanied by the inspection notes or the receipted challans, certifying approval, acceptance, and receipt of the goods mentioned therein. The banker is to see whether the bill has been drawn in conformity with the said note or challan. If not, the bill should not be advanced.
5. Each bill must be discharged by the drawer under the words “Received Payment” on an appropriate revenue stamp and a separate endorsement should be made to make payment of the bill to the bank.
6. An appropriate margin with a minimum of 25% depending on the creditworthiness of the borrower, the nature of the transaction, and the previous experience, if any, in this regard should be maintained while advancing on the security of the interim bill.
7. All the papers relating to the bills including the cover letter sent by the bank should be properly stamped with the bank’s crossing and other stamps. the bills should then be promptly forwarded by registered post with an acknowledgment-due to the respective departments for payment together with a covering letter stating that the bank has made an advance to the supplier/contractor against the bills and the proceeds of the bills should be remitted to the bank direct.
8. There is every possibility of any bill being held up for payment or rejected or refused. There may be a heavy deduction from the bill. It is also possible that forged bills are offered for collection. In all these cases, only careful and constant follow-up can save a banker. Banker is such a case will press the borrower for reimbursement of the amount advanced against unpaid bills. It is, therefore, more necessary that the banker should be very cautious in the selection of parties and only those parties should be accommodated who are reliable and of means for such type of work.
9. Bills remaining unpaid for two months or more are generally treated by the bank as overdue bills under collection and the amounts advanced there against be recovered from the borrower.
10. These supply bills are not covered by any tangible security and the advance against them is more or less clean advance. In view of the risky nature of such an advance, the banker should demand some collateral or additional security from the borrower. It may be an equitable mortgage of landed property or assignment of the insurance policies or personal guarantee of a creditworthy person.
Documents required for bank loan against supply bills
- Demand Promissory Note
- Letter of continuity
- Irrevocable Power of Attorney executed by the borrower in favor of ht bank.
- A letter of authority given by the borrower to the department concerned to receive payment by the bank on behalf of the borrower.
- Mortgage of property as collateral security.
- Letter of guarantee from a third party.
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