What Is Discounting Of Bills And Advantages Of Bill Of Exchange?

Purchasing and discounting of bills of exchange is another short term method of profitable instrument of banks funds. Bills of exchange can be discounted on rebate before its due date. The rebate or discount is earning of the bank. The bills of exchange usually mature within 90 days. In case a bill, say of rupees 2000 due 90 days hence is discounted today at 20 percent per annum, the borrower is paid rupees 1900. the bank however collects the full amount of rupees 2000 of the bill from drawer on maturity. The drawer or maker of the bill is expected to pay the bill on maturity.

The bank by discounting the clean or documentary bill advances the amount to the payee. On maturity of the bill the amount is collected from the drawer. The discount is the safe earning of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is dishonoured the payee is responsible to make the full payment of the bill to the bank. On the maturity of the bill there is certainly of payment to the bank. It is thus a short term advance with certainly of payment. As the date of payment to the bank is sure the short term advance is quite liquid.