Bill Rediscounting Scheme

The Reserve Bank of India (RBI) introduced the Bills Market Scheme (BMS) in 1952, which was later rechristened as the New Bills Market Scheme (NBMS). Under this scheme, commercial banks can rediscount the bills which were initially discounted by them with approved institutions such as Commercial Banks, Development Financial Institutions, Mutual Funds, Primary Dealers etc, thereby serving the purpose of rediscounts. In this article, we look at the Bill Rediscounting Scheme in detail. Know about NSIC Bill Discounting Scheme Click Here

Rediscounting of Bill

Rediscounting of commercial bills is a system wherein a financial institution rediscounts unmatured discounted commercial bills with any other financial institution.

Objectives of the BRS scheme

The objective of the BRS scheme are as follows:

To offer the creation of an instrument that encourages more disciplined use of bank credit.
To facilitate liquidity in the banking system.

Eligibility of Banks

All scheduled commercial banks are eligible to rediscount the bills with the Reserve Bank of India or any other institution.

Eligibility of Bills

Bills eligible for rediscount under the rediscounting bill scheme must be of the following characteristics:

The front portion of the bill indicates the nature of the transaction.
The usance period is not more than ninety days.
Purchaser’s licensed bank must have accepted the Bill.
The bill should consist of two proper signatures, one of which should be of the bank.
It is not eligible for commodities of the Reserve Bank of India.

Rediscounting Procedure by Banks

Commercial banks are entitled to draw derivatives of usance promissory notes for maturities of up to ninety days depending on the strength of commercial bills discounted by their respective branches. The function of rediscounting of bills and drawing derivatives promissory note is centralised with the bank’s main fund activity for effective control.

Timeline of the Approved Rediscounting

The term period for approved regular rediscounting will be one year unless the same is immediately cancelled, suspended, amended or extended by the Credit Committee. The rediscounting is renewable annually by submitting the application a month before the expiry of the specified date. For newly merged or consolidated banks, a temporary rediscounting may be granted for 180 days.

RBI’s Derivatives Regarding Bill Rediscounting

The RBI has made the following directives concerning bill rediscounting:

Rediscounting of the ineligible bill will be handled as an unsecured loan.
Only usance bills held by other banks can be rediscounted.
Finance companies cannot avail this facility.
Banks should not rediscount bills discounted by non-banks.
Accommodations bill has no scope for rediscounts.

Lodging of Bills with RBI

At the beginning of rediscounting of bills, the banks were required to lodge all such bills with RBI. This involved a lot of work to minimise these difficulties. The RBI has given with the requirement of lodging of eligible bills up to face value of Rs. 10 lakh, so banks now keep the bills even after rediscounting with them as agents of RBI on the due date payment is made.

Bill Markets Rate

SBI hundi rate – the rate at which SBI used to discount hundis of indigenous bankers.
SBI discount rate – the rate at which SBI discounts first class usance bills.
Commercial banks rate – the rate at which the commercial banks get the bill discounted with each other.
Bank rate – the rate at which the RBI discounts eligible bills from commercial banks

Importance of BRS in funds management

The importance of BRS in funds management are as follows:

BRS maintains a definite maturity period.
If dishonoured, provisions for the penalty are attractive.
Due to two good signature minimises the risk.
BRS proves the better way of using credit.
Banks can meet their meet their fund's requirements by discounting with RBI.

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Frequently Asked Questions

Common questions about Bill Rediscounting Scheme and Financial Management India.

Bill rediscounting is a system where a financial institution rediscounts unmatured, discounted commercial bills with another financial institution. This allows banks to manage their liquidity and access funds by rediscounting bills they had initially discounted.

The key objectives of the BRS are to encourage more disciplined use of bank credit and to facilitate liquidity in the banking system. It provides a mechanism for banks to rediscount eligible bills and access funds when needed.

All scheduled commercial banks are eligible to rediscount bills with the Reserve Bank of India or any other approved institution under the BRS.

To be eligible for rediscounting, bills must indicate the nature of the transaction, have a usance period of up to 90 days, be accepted by the purchaser's licensed bank, have two proper signatures (one from the bank), and not be related to commodities banned by the Reserve Bank of India.

Commercial banks can draw derivative usance promissory notes for up to 90 days based on the commercial bills they have discounted. This process is typically centralized for effective control.

The term period for approved regular rediscounting is one year, unless it is cancelled, suspended, amended, or extended by the Credit Committee. Newly merged or consolidated banks may be granted a temporary rediscounting period of 180 days.

The RBI has directed that rediscounting of ineligible bills will be treated as an unsecured loan, only usance bills held by other banks can be rediscounted, finance companies cannot avail this facility, banks should not rediscount bills discounted by non-banks, and accommodation bills have no scope for rediscounting.

The BRS maintains a definite maturity period, has provisions for penalties in case of dishonor, minimizes risk due to two good signatures, encourages better use of credit, and allows banks to meet their fund requirements by rediscounting with the RBI.

Previously, banks had to lodge all eligible bills with the RBI for rediscounting. However, to minimize work, the RBI has exempted the requirement of lodging bills up to a face value of Rs. 10 lakh, allowing banks to keep the bills after rediscounting and make payments on the due date as agents of the RBI.

The article mentions the SBI hundi rate (the rate at which SBI used to discount hundis of indigenous bankers), SBI discount rate (the rate at which SBI discounts first-class usance bills), commercial banks rate (the rate at which commercial banks get bills discounted with each other), and bank rate (the rate at which the RBI discounts eligible bills from commercial banks).