Commercial Bills
Commercial Bill Market
The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are of 30 days, 60 days or 90 days maturity.
If the seller is in need of funds, he may draw a bill and send it to the buyer for seller is in need of funds, he may draw a bill and send it to the buyer for acceptance. The buyer accepts the bill and promises to make payment on the due date. He may also approach his bank to accept the bill.
The bank charges a commission for the acceptance of the bill and promises to make the payment if the buyer defaults. Once this process in accomplished, the seller can sell it in the market. This way a commercial bill becomes a marketable investment. Usually, the seller will go to the bank for discounting the bill. The bank will pay him after deducting the interest for the remaining period of the bill and service charges from the face value of the bill. The interest rate is called the discount rate on the bills.
The commercial bill market is an important channel for providing short-term finance to business. However, the instrument did not become popular because of two factors:
Cash credit scheme is still the main form of bank lending, and
Big buyers in the corporate sector are still unwilling to the payment mode of commercial bills.
