Apart from sanctioning loans and advances in various forms and, on the security of various types of goods and documents, etc., Bills Purchased and Discounted are the way of employing the bank funds. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade.
These Bills of Exchange are classified into demand bills and usance bills. Where a bill is payable at sight or on-demand or on presentation, it is called a demand bill.
If a bill matures for payment after a certain period of time, say 30, 60, or 90 days after the date, or after sight, it is called a usance bill. Both these bills may be clean or documentary.
When the drawer of a bill encloses the documents of title to goods, such as a bill of lading, Railway Receipt, or against acceptance of bill, as the case may be, the bill is called a documentary bill. When the bills are not accompanied by documents, they are known as clean bills.
Bills purchased and discounted
In the case of the documentary bill where it is immediately payable, the banker receives the payment and releases the document to the importer to obtain the goods. Such a bill is known as a D/P (Document against Payment) bill.
Where such a bill is payable after some time, the banker secures the acceptance of the importer and releases the documents. Such a bill is known as a D/A (Document against Acceptance) bill. Such documentary bills can be in inland trade also.
The term “purchasing bill” is used in respect of “demand bill” while the term “discounting of bills” is used in respect of “usance bills”. In both cases, the bank immediately credits the account of the customer with the amount of the bill less any charges.
In the case of “purchasing of the bill” the charges are less because the bank can collect the payment immediately by presenting it before the drawee for payment.
In the case of “discounting of the bill” the charges are more because the bank, besides charging for the service rendered, will also charge for interest from the date of discounting the bill till the date of maturity.
In case of dishonor of the bill, the bank will debit the account of the customer with the amount of the bill together with other charges and interest.
Besides bills, banks also purchase cheques drawn by Government, Semi-Government Institutions, or any first-class party.
In this case, the amount of the cheque is credited to the party’s account to the debit of bills or cheque purchase account and, on receipt of the proceeds of the cheques, after collection, or cheque purchase account is liquidated.
In all the cases of Purchasing and discounting bills, the bank is granting advances to the customers and, therefore, “Bills purchased and discounted” are shown as advances by a bank on its Balance Sheet.
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Awesome article I must say. One thing I had in mind, if Bills are purchased, whether and importer fails to make the payment, whose liability it would be, as ‘purchase’ indicates transfer of risk and rewards. Bank’s or drawer’s? Please shed some light on this.