Banks/FIs act as a mediator/financer between buyer and seller. In order to ensure receipt of payment for the goods despatched to the buyer, the seller generates a Bill of Exchange (Hundi) to be sent to seller's Banker for collecting payment from buyer before releasing the transport receipt for getting goods delivery from the transporter. This process is called as Bill sent for Collection.
When seller of the goods has a sanctioned limit/arrangement for discounting bills then Banker/FI discount the bill and releases payment immediately after deducting interest and discounting commission, it is known as Bill Discounting.
Discount Margin : The margin between the advance granted by the Banker and the face value of the Bill of Exchange (BE) is called as discount, and it is calculated on the maturity value of BE at an agreed margin.
Maturity : Maturity of a Bill of Exchange is defined as the date on which payment will fall due. A normal maturity period is 30, 45, 60, 90, 120 and 180 days, which is also called as usance period. The BE could be raised for payment at sight also. Generally, grace period of 3 days from the date of maturity of the BE is allowed by the Banker to buyer for making payment.
Ready Finance : Banks/FIs discount and purchase the bills of their clients so that client gets immediate finance from the Bank. The Seller need not wait till the buyer's Bank collect the payment of the bill.
There are domestic bill discounting, import bill finance and Export bill discounting.
Import Bill Finance is a short-term finance offered by the Banks to the importer according to the terms of letter of credit (LC), upon receipt of import bill.
Export Bill Discounting is financing of goods despatched overseas under an LC or without LC either at sight or for usance period of BE.
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