Laws Relating to Bill Finance | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS
Laws Relating to Bill Finance
1. Introduction
Bill finance refers to financial services offered against bills of exchange. These bills represent a written unconditional order by one party to another to pay a certain sum of money on demand or at a fixed future date.
2. Class of Bills and Laws Governing Bills
Bills of Exchange are governed primarily by the Negotiable Instruments Act, 1881. Other relevant laws include the Indian Contract Act, 1872 and Sale of Goods Act, 1930.
- Inland Bill: Drawn and payable within India.
- Foreign Bill: Drawn or payable outside India.
3. Classification of Bills
- Demand Bills: Payable on sight or presentation.
- Usance Bills: Payable after a specified period (e.g., 30 days, 60 days).
- Clean Bill: No documents attached; carries higher risk.
- Documentary Bill: Accompanied by shipping and other documents.
4. Various Types of Bill Finance
- Purchase of Bills: For demand bills; bank credits amount to customer's account after deducting discount.
- Discounting of Bills: For usance bills; bank pays the customer after deducting interest (discount).
- Advances against Bills under Collection: Bank gives loan based on bills sent for collection.
- Bills under Letters of Credit (LC): Safer, as payment is assured by issuing bank.
5. Mathematical Illustration
Example: A customer discounts a 60-day bill of ₹1,00,000 with a bank at an annual discount rate of 10%.
Solution:
Discount = (Amount × Rate × Time)/100
= (1,00,000 × 10 × 60) / (100 × 365)
= ₹1,643.84 (approx.)
Net Proceeds = ₹1,00,000 - ₹1,643.84 = ₹98,356.16
6. Bill Finance and Legal Position of a Banker
- The banker becomes the holder in due course of the bill.
- Banker has right of recourse to drawer or endorser if bill is dishonoured.
- Precaution must be taken for genuine and valid documents, signatures, and endorsements.
- Endorsements must be in order and bills must be free from defects in title.
7. Multiple Choice Questions (MCQs)
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Which act primarily governs Bills of Exchange in India?
- A. Indian Penal Code
- B. Negotiable Instruments Act, 1881
- C. Indian Evidence Act
- D. Companies Act
Answer: B
-
A bill payable after a certain period is called:
- A. Demand Bill
- B. Usance Bill
- C. Foreign Bill
- D. Inland Bill
Answer: B
-
In bill discounting, the bank:
- A. Pays full value of the bill
- B. Charges a fee only
- C. Deducts discount and pays the rest
- D. Only collects the bill on due date
Answer: C
-
Which of the following bills includes shipping and commercial documents?
- A. Clean Bill
- B. Documentary Bill
- C. Inland Bill
- D. Usance Bill
Answer: B
-
Legal right of a banker in case of dishonoured bill is:
- A. No right
- B. Right to sue only the drawee
- C. Right of recourse to drawer or endorser
- D. Only to charge penalty
Answer: C
-
Inland bills are:
- A. Drawn in India and payable outside India
- B. Drawn and payable within India
- C. Payable only in foreign currency
- D. Governed by RBI
Answer: B
-
Bills under collection:
- A. Are bought by the bank
- B. Remain with the customer
- C. Are sent by bank for collection
- D. Cannot be used for finance
Answer: C
-
Discount rate in bill discounting refers to:
- A. Interest charged annually
- B. Fee for cheque clearance
- C. Annual interest calculated in advance
- D. GST rate on finance
Answer: C
-
Holder in due course has:
- A. No special rights
- B. Only moral rights
- C. Rights against prior parties
- D. Rights only against the drawee
Answer: C
-
Which of the following is more secure for a banker?
- A. Clean Bill
- B. Usance Bill
- C. Bill under Letter of Credit
- D. Demand Bill
Answer: C
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