Trading or selling a bill of exchange prior to the maturity date
at a value less than the par value of the bill. The amount of the discount will depend on the amount of time left before the bill matures , and on the perceived risk attached to the bill.
Types of Bills: Demand Bill Usance Bill Documentary Bills
D/A Bills D/P Bills Clean bills
Creation of a Bill of Exchange(B/E)
Suppose a seller sells goods or merchandise to a buyer. In most
cases, the seller would like to be paid immediately but the buyer would like to pay only after some time, that is, the buyer would wish to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity on the buyer. The seller has assumed now the role of a creditor; and is called the drawer of the bill. The buyer, who is the debtor, is called the drawee. The seller then sends the bill to buyer who acknowledges his responsibility for payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be by the buyer himself or any third party willing to take on the credit risk of the buyer.
Advantages To Investors To banks Discount Rate and Effective Rate of Interest
Bill Financing - Historical Perspective
Origin Hundies and Bill of Exchange Various committees appointed by Government of india and
reserve bank of india Central Banking Enquiry Committee and Bill Market Scheme New Bill market scheme
Present Position of Bills Discounting
The Jankiraman Committee Banks have been providing bill finance outside the consortium
without informing the consortium bank-ers; The rediscounting of bills by finance companies with banks was done at a much lower rate of interest; No records regarding bill discounting were ever maintained by banks. They have been drawing bills on companies and they themselves discounted such bills to avail of rediscount facilities;
RBI issued guidelines to banks
Bill finance should be a part of the working capital credit limit; No fund/non-fund based facility should be provided by banks outside the consortium arrangement; Accommodation bill should never be discounted; Funds accepted by banks for portfolio management should not be deployed for discounting bills.
Bill Financing, has not been able to even partially substitute
cash credit. In India, the major reason cited for the non-development of bill financing is the hesitation of the industry and trade to subject themselves to the rigours of bill discipline. Operational and procedural hassles currently obtaining in banking system too are said to impede the growth of bill financing even amongst those business segments where it has found acceptance.
Meaning of Factoring Factoring means an arrangement between a factor and his client.
CLIENT
CUSTOMER
FACTOR
Characteristics of Factoring Credit Administration Credit Collection and Protection Financial Assistance Other Services
Difference Between Bill Discounting & Factoring
Services Advances and Purchases Responsibility Rediscounting Recourse Transaction Orientation Recording
Confidentiality
Modus Operandi Factoring Agreement Preparation of invoices Dispatching of goods Assignment of debt due Handling of Invoices Payment by the Factor
Types of Factoring Full service Factoring With Recourse Factoring Maturity Factoring Bulk Factoring Invoice Factoring Agency Factoring International Factoring
Suppliers Guarantee Factoring
Limited Factoring Buyer Based Factoring Seller Based Factoring
Costs of Factoring The factoring commission or service fee The interest on advance granted by the factor to the firm
Benefits of Factoring Factoring provides specialized services in credit management,
and thus, helps the firms management to concentrate on manufacturing and marketing. Factoring helps the firm to save cost of credit administration due to the economies of scale and specialization, Through factoring, firms can improve their cash flow through prepayment facilities up to a certain percentage (80-90 percent) of the value of the assigned invoices as and when necessary
1. 2. 3.
4. 5.
Administration of sales Ledger Provision of collection facility Financing trade debts Credit Control and credit protection Advisory Services
Factoring in India factoring services have been introduced since 1991 in
India In India for the first time, the Vaghul Committee which submitted its report on the Money Market, recommended the development of a system of factoring of open account sales particularly for the small scale industrial units.
Later, the Kalyaansundaram Committee found an abundant
scope for such services and hence strongly advocated for the introduction of factoring services in India. Subsequently a suitable amendment was made in the Banking Regulation Act 1949 the RBI permitted both the State Bank of India and Canara Bank to start factoring services through their own subsidiaries SBI Factors and Commercial Services Ltd. and Can bank Factors Ltd; sponsored by the State Bank of India and Canara Bank respectively, commenced operations in 1991
In 1993 the RBI allowed all the scheduled commercial banks
to introduce factoring services either departmentally or through a subsidiary set-up
there are a few NBFCs such as Formost Factors Ltd. , Global
Trade Finance Pvt. Ltd. (a subsidiary of EXIM Bank) and Integrated Financial Services Ltd., which are also in the business of factoring in India Besides these NBFCs, SIDBI, Honkong and Shanghai Banking Corporation have been offering factoring services to their clients.
f http://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=1659 http://www.psnacet.edu.in/courses/MBA/Financial%20services /7.pdf http://www.languages.ind.in/factoring.htm Books Financial services by M.Y. Khan Financial Market and Services by Gordon Natarajan Financial services and system by K. Sasidharan and Alexi K Mathews
