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Bill Rediscounting Scheme

Bill Rediscounting Scheme

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.

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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.