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    Bills Discounting, Factoring & Forfaiting

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    Vineet Harit
    1) Bills discounting involves a seller providing bills (negotiable instruments) to a financier in exchange for immediate funds, at a discount to the bill's face value. The financier provides short-term financing and earns interest. 2) It provides advantages to both the drawer (seller), such as short-term financing outside of lending laws, and to the financier, including safety of funds and certainty of repayment. 3) However, developments in bills discounting have faced impediments such as stamp duties and banks' reluctance. RBI has issued guidelines on bills discounting and related activities.

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    Bills Discounting, Factoring & Forfaiting

    Uploaded by

    Vineet Harit
    355 views23 pages
    1) Bills discounting involves a seller providing bills (negotiable instruments) to a financier in exchange for immediate funds, at a discount to the bill's face value. The financier provides short-term financing and earns interest. 2) It provides advantages to both the drawer (seller), such as short-term financing outside of lending laws, and to the financier, including safety of funds and certainty of repayment. 3) However, developments in bills discounting have faced impediments such as stamp duties and banks' reluctance. RBI has issued guidelines on bills discounting and related activities.

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    Bill Discounting, Factoring & Forfaiting

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    1) Bills discounting involves a seller providing bills (negotiable instruments) to a financier in exchange for immediate funds, at a discount to the bill's face value. The financier provides short-term financing and earns interest. 2) It provides advantages to both the drawer (seller), such as short-term financing outside of lending laws, and to the financier, including safety of funds and certainty of repayment. 3) However, developments in bills discounting have faced impediments such as stamp duties and banks' reluctance. RBI has issued guidelines on bills discounting and related activities.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    355 views23 pages

    Bills Discounting, Factoring & Forfaiting

    Uploaded by

    Vineet Harit
    1) Bills discounting involves a seller providing bills (negotiable instruments) to a financier in exchange for immediate funds, at a discount to the bill's face value. The financier provides short-term financing and earns interest. 2) It provides advantages to both the drawer (seller), such as short-term financing outside of lending laws, and to the financier, including safety of funds and certainty of repayment. 3) However, developments in bills discounting have faced impediments such as stamp duties and banks' reluctance. RBI has issued guidelines on bills discounting and related activities.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 23

    BILLS DISCOUNTING

    1. BILLS & TYPES 2. BILLS DISCOUNTING & ADVANTAGES 3. IMPEDIMENTS & GUIDELINES 4. BILLS DISCOUNTING vs. FACTORING

    COMMERCIAL BILLS
    BILLS MARKET SCHEME 1952 RBI

    BILLS DISCOUNTING SCHEME 1970 goods

    Seller

    cash Goods + bills

    Buyer

    ii Drawer

    Drawee Bills accepted

    Bill of Exchange
    (Negotiable Instruments Act, 1881) The Bill of Exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument.

    Types of Bills
    Payment Activity

    Title of Goods

    1. Demand Bill 2.Usance / time Bill

    Docu ment ary Bill

    Clean Bill

    Trade Bill

    Accommodation Bill

    Documents against Acceptance (D/A)

    Documents against Payment (D/P)

    OPTIONS TO THE DRAWER OF BILLS


    HOLD IT TILL MATURITY 2. DISCOUNT IT WITH A DISCOUNTING AGENCY (Bank, NBFC, Company or a high net worth individual)
    1.

    SOME OF THE TERMS USED IN BILLS DISCOUNTING


    a.

    b.
    c. d. e.

    READY MONEY FACE VALUE MARGIN / DISCOUNT MATURITY PERIOD KITE FLYING

    Advantages to the drawer (Investor)


    1.
    2.

    3. 4. 5.

    Short-term source of finance Does not come under purview of section 370 of Indian Companies Act, 1956 Not considered as lending, so no TDS Rates on discounting < rates on ICDs Flexibility

    Advantages to the Financier (Bank / NBFC)


    1.
    2. 3. 4.

    Safety of funds Certainty of payment Profitability Reduction in inter-bank liquidity problems

    IMPEDIMENTS IN THE DEVELOPMENT OF BILLS MARKET


    1.

    2.
    3. 4. 5. 6. 7.

    Stamp duty Supplies of stamp paper Reluctance in acceptance Cash credit system Administrative work First class bills (negotiable & marketable) Banks role

    Exercise
    If the discount rate of a bill with a face value of Rs. 1,00,000 is 20%. What is the effective interest rate, if the usance period is 90 days.

    RBI GUIDELINES (1992)

    No facility outside consortium arrangement Part of working capital Bills for purchase of raw material / inventory Accommodation bills not to be discounted Rediscounting of usance bills Not to deploy funds for portfolio management Overall credit limit for NBFCs > 3 times net worth LC backed bills NOC from Beneficiary bank

    LC (letter of Credit)
    Letter of credit is a financial instrument issued by a bank on behalf of purchaser of goods, undertaking responsibility to pay a certain amount during a specified period, for goods delivered.

    CREDIT EVALUATION

    APPRAISAL OF CUSTOMER
    OPERATIONS FINANCIAL VIABILITY CREDIT EVALUATION OF DRAWEE IBA BULLETIN CREDIT INTELLIGENCE DATABASE

    REVIEW LIMITS
    QUANTUM OF BUSINESS CREDIT WORTHINESS (DRAWER) CREDIT WORTHINESS (DRAWEE) NATURE OF INDUSTRY PAST PERFORMANCE

    Utilization, drawee payments, drawer payments

    FACTORING
    An arrangement between a factor and his client which includes at least two of the following services provided by the factor * Finance * Maintenance of accounts * Collection of debts * Protection against credit risk

    Differences between Factoring & bill discounting


    Recourse

    Drawer collects Provision of finance Rediscounting possible Individual transaction

    Recourse / without recourse Factor collects Also additional services Rediscounting not possible Bulk financing

    FORFAITING
    It is a form of financing of receivables pertaining to international trade. It denotes the purchase of trade bills/promissory notes by a bank / financial institution without recourse to seller. Purchase in the form of discounting covering entire risk of non payment in collection.

    Features
    1. 2.

    3.
    4. 5.

    Exporter sells goods and delivers them Importer purchases on deferred payment Importer draws promissory notes or accepts bills of exporter Promissory notes or bills are guaranteed by a bank Guarantee by bank is known as Aval.

    FEATURES
    6. Exporter enters in to a forfaiting arrangement with exporters bank 7. Exporter sells ovalled notes / bills at discount without recourse. 8. Payment by forfaiter to the exporter. 9. Forfaiter holds till maturity or securitizes and sells.

    FORFAITING AGREEMENT
    a.

    b.
    c. d.

    e.
    f.

    g.

    Cost of forfaiting Margin to cover risk Commitment charges Days of grace Fee to compensate the forfaiter for loss of interest due to transfer & payment delays Period of forfaiting contract Installment of repayment

    Rate of interest / discount


    1.
    2. 3. 4.

    Terms of note / bill Currency Credit rating of availing bank Country risk

    Factoring vs. Forfaiting


    1.

    2.
    3. 4. 5.

    Discounting Decision Nature of transaction Term Foreign exchange

    Importer
    3

    Exporter
    2 6 4 5 4 4 4

    Forfaiter

    Importers bank

    1. Commercial Contract

    2. Forfaiting arrangement 3. Delivery of goods 4. Delivery of drafts against shipping documents 5. Endorsement of drafts with shipping & trade documents 6. Payment of amount less discount 7. Presentation of drafts on maturity 8. Payments of drafts

    Thank you

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