Discounting of Bills of Exchange
Bills of Exchange are generally payable after a certain period which is called the tenure of the bill (i.e on maturity).
However it may so happen that the holder* is in need of money urgently and wants to get it against the amount mentioned in the bill at an earlier date before the due date. In such case he can discount the bill with a bank (or a discounting house).
Discounting of Bills of Exchange is a process by which the holder of a bill can get the amount mentioned in the bill before maturity date after deduction of a small charge known as the discounting charge. Discounting charge is generally mentioned in terms of percentage per annum (e.g 10% p.a.).
*Holder: Holder of Bill of Exchange is that person who is legally entitled to receive the money due on a bill of exchange.
How Discounting of Bill Works?
Let me take an example to demonstrate the whole process of discounting.
Suppose on 01.01.2017, Mr C draws a 3 months’ bill of Rs 30,000 on Mr D who accepts and returns it to Mr C immediately. On the same day, Mr C discounts the bill with a bank at a discount of 12% p.a. The bill is duly honoured by Mr D at maturity.
On 01.01.2017 (i.e on the date of drawing of bill)
Mr C gets the bill discounted by bank and gets Rs [30000-(30000*12%*3/12)] i.e Rs 29,100 immediately. Bank keeps the bill with itself and gets it endorsed in its favour.
On 04.04.2017 (i.e on the date of maturity of the bill)
Bank presents the bill to the drawee i.e Mr D for payment. Mr D pays Rs 30,000 to the bank as the bank is now the Holder of the bill.
- Mr C gets the amount against the bill three months early by paying a discounting charge to the bank. This discounting charge is nothing but an interest taken by the bank for providing the money early to Mr C.
- The Bank earns the discounting charge in the process.
- The process of discounting does not affect the drawee ie. Mr D. He was entitled to pay the money after three months and he pays it after three months.
If you are conversant with Hindi language then watch the video below for a clear explanation of the discounting process
Endorsement of Bills of Exchange
The meaning of the word ‘Endorsement’ is ‘signing on the back’.
In case the Payee or Holder of a bill wants to transfer his right to receive the money against the bill to some other person, he can do so by signing-
- on the face of the bill; or
- on the back of the bill; or
- on a separate sheet annexed with the bill (in case there is no space to sign on the face or back of the bill)
The person who transfers the right is called ‘Endorser‘. The person to whom the transfer is made is called the ‘Endorsee‘. And the process of transfer of the right is called ‘Endorsement‘.
In this context I would like to mention that Bills of Exchange are negotiable instruments and it is the basic character of negotiable instruments that the right to receive money can be transferred to another person.
On 01.01.2017, Mr C draws a 3 months’ bill of Rs 30,000 on Mr D who accepts and returns it to Mr C immediately.
Mr C has a creditor, Mr S, whom he owes Rs 30,000. Mr C endorses the bill in favour of Mr S to settle his debt.
Previously before the endorsement, Mr C was the payee of the bill and was entitled to receive payment against the bill. Now as the bill is endorsed in favour of Mr S, Mr S becomes the holder of the bill and gets the right to receive payment from the drawee i.e Mr D against the bill.
Please note that if Mr S wants, he can endorse the bill to some other person making that other person the holder of the bill.
Watch video tutorial in Hindi to understand endorsement better
Dishonour of Bill of Exchange
Dishonour of Bill can be of two types:
- Dishonour of Bill by Non-Acceptance: Where the Drawee of the bill refuses to accept the bill drawn on him by the drawer.
- Dishonour of Bill by Non-Payment: Where the Drawee of the bill initially accepts the bill but fails to pay the amount on due date or presentment, as the case may be.
Noting and Protest
When a Bill is dishonoured, the fact of dishonour can be authenticated legally by the process of Noting. Noting is done by a Notary Public.
Generally, the holder of a dishonoured bill approaches the Notary Public to get the fact of dishonour noted legally. The Notary Public once again presents the bill for acceptance or payment to the drawee, and if the drawee still refuses to accept or pay the amount then the fact is noted on the bill.
Remember that Noting is a legal evidence of the fact of dishonour of the bill accepted by the court of law.
Fees paid to Notary Public for noting is called Noting Charges.
If the holder wants, he can get the fact of dishonour certified by the Notary Public in addition to noting on the bill. In such cases the Notary Public issues a formal certificate regarding the dishonour with his seal and signature. This certificate is called Protest.
Retiring of Bill
Where the acceptor of a bill pays it before the due date, it is called retiring of the bill. The holder of the bill usually allows a deduction from the amount of the bill for such prior payment. This deduction is known as ‘Rebate‘.
Rebate is calculated at a certain percentage on the bill amount for the period by which the bill was discharged early (i.e from the date of payment to the actual date of maturity).
That would be all in this article. Hope you liked it. Please let me know via the comments whether you could get an understanding of the topics covered here. Any suggestions for improvement are also welcome. Thanks for reading! Also visit our YouTube Channel for tutorial videos on Accounts.
Also Read: An Introduction to Bills of Exchange