Purchasing and Discounting of Bills

In this case, a bank lends without any collateral security. The seller draws a bill of exchange on the buyer of goods on credit. Such a bill may be either a clean bill or a documentary bill which is accompanied by documents of title to goods such as railway receipts. The bank purchases the bills payable on demand and credits the customer’s account with the amount of bill less discount. At the maturity of the bills, bank presents the bill to its acceptor for payment. In case the bill discounted is dishonoured by non-payment, the bank recovers the full amount of the bill from the customer along with expenses in that connection.

Often when goods are sold, as opposed to making payment in cash or by cheque, the buyer draws a bill of exchange instructing the buyer to make payment to the Bank processing the documents or to a third party.

A bill of exchange is “an instrument in writing containing an unconditional order, signed by the maker directing a certain person to pay a certain sum of money to, or to the order of certain persons or to the bearer of the instrument” ( Section 5 of the Negotiable Instruments Act).