Making bill finance available at interest rates lower than loan or cash credit, freedom to individual banks to lay down norms, abolition of stamp duty on bills of usance up to 182 days and exemption from stamp duty to financial institutions and registered non-banking finance companies are some of the recommendations of the Working Group on Discounting of Bills by Banks. The Working Group has also recommended allowing borrowers to discount bills drawn under letters of credit with any bank of their choice outside the existing consortium/multiple banking arrangements and creation of new alternatives to bill financing as well as introduction of a credit insurance scheme to ensure that domestic receivables are on lines similar to those prevailing abroad.

The Working Group was set up by the Reserve Bank of India in December 1999 to examine the possibility of extending bills discounting facility to services sector especially industries such as information technology, software services, travel and tourism, etc. The Working Group submitted its report to the Reserve Bank of India on September 7, 2000. The Working Group was constituted under the Chairmanship of Shri K.R. Ramamoorthy, Chairman, Vysya Bank Ltd. and comprised members drawn from commercial banks and different central office departments of the Reserve Bank of India. The Group co-opted representatives from trade, industry and services sector as additional members to have the benefit of their views and to ensure that the findings of the Group are relevant to the trade, Industry and services sector.

In view of services sector transforming the economic profile of the country and being poised to register tremendous growth and contribute significantly to overall strength of the economy, the Group undertook a detailed scrutiny of the key issues involved in bill financing and examined the possibility of strengthening the existing bill discounting mechanism and extend its scope to services sector.

The Group has made several recommendations duly taking into account the Indian context in respect of bill financing, Bankers’ Acceptance, and the scope for extending Bill financing to services sector. The important recommendations in brief are:

• Bill finance being the preferred style of credit form the bankers’ point of view should carry interest lower than loan or cash credit, which is in line with international practice.

• In respect of bill transactions, individual bank should be given the freedom to lay down norms for satisfying themselves about the genuineness of underlying commercial transactions and/or the movement of goods.
• Banks should evolve the system of 'value-dating' of clients account
• Stamp duty for all bills of usance upto 182 days may be abolished
• The exemption from stamp duty should be made available to bills discounted by Financial Institutions and Registered Non-Bank Finance Companies.
• All corporate and other commercial entities who have a turnover above a threshold level may be mandated to disclose the 'aging schedule' of their overdue payables in their annual reports as well as in their periodical reports to their banks
• Borrowers may be permitted to discount bills drawn under Letters of Credit with any bank of their choice, outside the existing consortium/multiple banking arrangements
• New alternatives to bill financing like Invoice Financing and Secured Fixed Rate Note on the lines of asset -backed Commercial Paper, prevalent in developed markets may be introduced. Factoring services could also be revitalized.
• A Credit Insurance Scheme for ensuring domestic receivables on lines similar to the ones prevailing abroad may be introduced.
• Bankers’ Acceptance (BA) may be introduced in the Indian market to finance import, export and domestic trade transactions. However, care has to be taken to ensure that BAs are issued to cover only genuine trade transactions
• Borrowing clients who enjoyed working capital limits of Rs.10 crore and above and whose rating with the bank has been consistently satisfactory may be allowed drawals against the Working Capital Demand Loan (WCDL) component on the basis of the tradable promissory note in favour of the lending bank called 'Bank Paper'
• Banks may be permitted to entertain purchase/discount of bills drawn by service providers on their debtors, subject to the satisfaction of the banker that the service has been rendered.

The Group has also considered it appropriate to briefly advert to one of the key emerging trends in the world of business, viz, the use of inter-net as a potent cost effective tool for electronic commerce (e-commerce). Looking at the wave of optimism being shared in the developed markets on the future potential of e-commerce and their preparedness to meet them, the Group has recommended that an expert group drawn from the fields of technology, banking and corporate finance may be constituted to prepare the blue-print for meeting the e-commerce challenges that may be thrown up in the financial sector of the country.

The full text of the report of the Working Group on Bills Discounting by Banks has been placed on the RBI website (www.rbi.org.in)

Suggestions/comments may be sent to The Chief General Manager, Industrial and Export Credit Department, Reserve Bank of India, Central Office Building, 12th floor, Shahid Bhagat Singh Road, Mumbai-400001 or through Fax at 2660407, 2661256 or e-mail - rbibiecd@giasbm01.vsnl.net.in

Alpana Killawala
General Manager

Press Release : 2000-2001/482