Procedure for Rediscounting

Eligible banks are required to apply to the RBI in the prescribed form, giving their estimated requirements for the 12 months ending October of each year, and limits are sanctioned / renewed for a period of one year running from 1st November to 31st October of the following year. The RBI presents for payment, bills of exchange rediscounted by it and such bills have to taken delivery of by the rediscounting banks against payment, not less than three working days before the dates of maturity of the bills concerned. In case the bills are retired before the dates, pro-rata refund of discount is allowed by the RBI.

For rediscounting purposes, bills already rediscounted with the RBI may be lodged with it. The unexpired period of the usance of the bills so offered should not be less than 30 days and the bills should to bear the endorsement of the discounting bank in favor of a party other than the RBI.

Banks to hold Bills rediscount: In the first year of operation of the scheme, the banks were required to lodge all eligible bills with the RBI for availing themselves of the rediscounting facilities. In November 1971, actual lodgment of bills of the face value of Rs 2 lakh and below was dispensed with and the banks were authorized to hold such bills with themselves. This limit was increased to Rs10 lakh in November 1973. The banks are required to make declarations to the effect that they hold eligible bills of a particular aggregate value on behalf of the RBI as its agents, and on this basis the RBI pays to them the discounted value of such bills. The discounting banks are also required to endorse such bills in favor of the RBI before including them in the declarations and also re-endorse the bills in their own favor when they are retired. Since 1975, banks are permitted to rediscount bills with other commercial banks as well as certain other approved financial institutions. Since June, 1977, there is a ceiling on the rate of rediscount on such bills which has been varied by the banks from time to time.

The bills rediscounting scheme over the years has been gradually restricted and at present this facility is operated by the RBI on discretionary basis. During the year 1981-82 (July-June) no fresh bills rediscounting limits were sanctioned to the banks, and as such, there were no outstanding under the scheme from October 23, 1981. The amount of bills rediscounted each year has shown wide variations, but during each of the four years (1974-75 to 1977-78) (April-March), the volume had been well over Rs 1,000 crore; in subsequent years, a comparative declining trend set in the utilization of the facility due to its being available only on discretionary terms.

In order to revitalize the bill market scheme, several committees made recommendations in the light of the experience of the operation of the scheme. On the basis of these, several measures were initiated by the RBI to promote bill financing. The important ones being: (1) a ceiling on the proportion of receivables (75 per cent) eligible for financing under the cash credit systems, (2) discretion to banks to sanction additional ad hoc limits for a period not exceeding 3 months, up to an amount equivalent to 10 per cent of the existing bill limit subject to a ceiling of Rs 1 crore, (3) stipulation on ratio of bill acceptance to credit purchases (25 percent) , (4) setting up of the Discount and finance House of India (DFHI) to buy/sell/discount short term bills, (5) reduction in the discount rate on usnace bills. (6) remission of stamp duty on bills drawn on/made by/ in favor of bank / corporative bank. The procedure requiring the bill to the endorsed and delivered to the re-discounter at every time of rediscounting has been done away with. A derivative usance promissory note is issued by the discounter on the strength of the underlying bills which have tenor corresponding to, or less than, the tenor of the derivatives usance promissory note and in any case not more than 90 days. The derivative promissory note is expected from stamp duty.

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