Bill discounting – Appraisal of customer

(1) The most important step is a careful scrutiny of the customer’s operations and his financial viability. For this, a detailed analysis of his financial statements is carried out.
(2) Since the liability of the drawee also arises in case he accepts and dishonours the bill, credit information about the drawee is also collected. The drawer is asked to furnish a list of his purchasers and their banks so that a report of their credit risk can be compiled. This is especially easy for banks, as a confidential report can be easily routed through banking channels.
(3) Banks have access to frequently published Indian Banks Association (IBA) bulletins which indicate the names of unsatisfactory drawees/banks and their default rates.
(4) Both banks and NBFCs have built up substantial credit intelligence database which are constantly updated based on market information. Once a client defaults, he is blacklisted and may find it difficult to discount his B/E subsequently.

Thus, in case of an existing client it is assessed, that there is no overdue bill pending and the clients’ limits cover the amount of the bill submitted for discounting. In the case of a new client, thorough enquiry about the creditworthiness of the party is made from the banker of the client, market and other finance companies. Once satisfactory report is obtained, a limit is normally fixed for the party. An effort is made to ensure that the risk is well spread amongst several drawees. In order to keep a proper control, there should be proper follow up of the bills due and the limits fixed for the clients should be reviewed/reassessed at an appropriate interval of time. Special attention is paid to the following points while reviewing bills discounting limits:

(1) The earlier sanctioned limits are fully utilized by the client;
(2) The bills were promptly paid on maturity date;
(3) In case of unpaid bills, funds were paid by the drawer.

Once the party is granted a bills discounting limit, the party approaches the finance company for each and every bill for discounting. The following documents are submitted along with the letter of request:

(a) Invoice
(b) Challan
(c) Receipt of goods acknowledged by buyer
(d) Hundi/Promissory note
(e) Truck receipt/ railways receipt
(f) Post dated cheque for the interest amount

While fixing the limit for bills discounting, the balance sheet and profit and loss accounts are properly analyzed and various ratios are calculated to arrive at a sound business decision.

Precautions: Finance companies take the following precautions while discounting bills:

1. The bills are not accommodation bills but are genuine trade bills.
2. Bills are drawn on the places were the finance company is operating or has a branch office as it would facilitate contact with drawee in case of exigencies.
3. The goods covered by the documents are those in which the party deals
4. The amount of the bills commensurate with the volume of business turnover of the party.
5. Bills are drawn on a place where the goods have been consigned.
6. The credit report of the drawee is satisfactory
7. The description of goods mentioned in the invoice and railways receipt/truck receipt are the same.
8. The goods are not consigned directly to the buyer.
9. The goods are properly insured.
10. The usance bill is properly stamped
11. Bills offered for discount do not cover goods whose prices fluctuate too much.
12. The goods covered under the bill are not of perishable nature
13. The bills are not stale
14. The truck receipt is in the form prescribed by the Indian Banks Association.
15. The bills are drawn in favor of the finance company and have been accepted by the drawee. —