(Commercial and treasury BILLS MARKET (Commercial and treasury bills market)

Commercial Bill Under section 5 of Indian Negotiable Instrument Act a bill means “An instrument in writing containing an unconditional order, signed by marker, directing a certain person to pay a certain sum of money only to, or order of a certain person, or to the bearer of instrument.”

Features of a Bill It must be in writing. It must contain an order to pay. Unconditional order. It must be signed by drawer. Parties to bill: drawer, drawee & payee. Sum payable must be certain.

Features (cont..) Payment must be in money. It must be payable on demand or otherwise. Requires acceptance. Must be stamped. Self liquidating instrument. Drawn for short period.

Types of Bills Bills are generally of two types: a) Commercial Bills b) Treasury Bills: these bills are issued by central government for short period loans and are sold by Reserve Bank of India on behalf of the govt.

Types of Commercial Bills A. According to time (a)Demand Bill or Sight Bill: a bill of exchange which is payable on demand or at sight. (b)Time Bill or Usance Bill: a bill of exchange payable after the expiry of a fixed period is called a time bill or usance bill.

B. According to place (a) Inland Bill: A bill of exchange which is drawn and payable in same country. (b) Foreign Bill: A bill of exchange which is drawn in a foreign country and is payable in a foreign country. *Bill in sets. Foreign bills are generally drawn in sets of two or three in order to avoid the risk of loss in transit.

C. According to Objective or Usage (a) Trade Bill: A bill of exchange drawn in respect of trade transaction drawn by seller on buyer in respect of payment of price of goods sold. (b) Accommodation Bill: A bill which is drawn or endorsed without receiving any value thereof. These bills are drawn to raise loans. They are drawn to accommodate another person and are not genuine bills.

D. From viewpoint of payment or according to receiver (a) Bearer Bill: A bill of exchange which is payable to any person who presents it for payment. (b) Order Bill: A bill which is payable to a certain person named in the bill or his order. Not payable to bearer.

IMPORTANCE OF ADVANTAGES OF COMMERCIAL BILL MARKET Commercial bill market is an important source of short term funds for trade and industry. It provides liquidity and activates the money market. Bill market is essential for the development of money market. 789

Written verification of Debt. Negotiable instrument Exact date of payment Discounting facility Easy transfer of money Credit facility Facilitates foreign trade Financial help Liquidity Easy control of the central bank

OPERATIONS IN COMMERCIAL BILL MARKET From the operations point of view, the bill market can be classified into two categories: Discount market Acceptance market

DISCOUNT MARKET The discount market refers to a market place where short-term instruments such as commercial bills or treasury bills are discounted by financial intermediaries such as commercial banks. In U.K, there are specialized institutions called discount houses which specialize only in the field of discounting bills and papers. Before 1988, the RBI helped the commercial banks in their liquidity management by providing them rediscounting of bills facility so that banks get abundance liquidity in times of liquidity shortages. But with the setting up of DFHI, discounting or rediscounting facilities are now being provided by the DFHI.

ACCEPTANCE MARKET Raymond P. kent, in his book “Money and Banking” has states that banker’s acceptance is “a draft drawn by an individual or firm upon a bank and accepted by the bank whereby it is ordered to pay to the order of a designated party or to bearer a certain sum of money at a specified time in future.” We should like to draw a distinction between a banker’s acceptance and a cheque. A banker’s acceptance is payable at a specified future date whereas a cheque is payable on demand. Banker’s acceptances can be easily discounted in the money market because they carry the signature of the bankers. In the Indian Money Market these have no significance because there is no development of the acceptance market.

CHARACTERISTICS OF A DEVELOPED BILL MARKET A well-developed bill market of any country is characterized by the following features: There is a practice of borrowing against commercial bills in that country. There is continuous and quite large supply of bills in such a market. Commercial bank provide credit to their customers on discounting of these bills. The market offers facilities to rediscount that bills. The central bank of the country is willing is rediscount these bills readily throughout the year. Bill market provides facilities for acceptance of bills at a low cost. A large number of brokers and dealers in bills function to help the smooth functioning of the bill market.

DEFECTS OR SHORTCOMINGS OF INDIAN BILLS MARKET The reasons for the poor development or the shortcomings of the Indian bills market are as below: Preference for cash credit Lack of uniform practices Stamp duty Absence of secondary market Limited discounting and rediscounting services Difficulty in determining genuineness of bills Velocity of circulation of bills .

OPERATIONS OF TB MARKET IN INDIA 1. Government of India issues three types of TB through auctions, namely, 91 days, 182 days and 364 days. 2. There are no TB issued by State Government. 3. TB are available for a minimum amount of ₹25,000 and its multiples of ₹25,000. 4. TB are issued at a discount and are redeemed at par. 5. TB are also issued under the MARKET STABILISATION SCHEME (MSS)

6. While 91 day TB are auctioned every week on Wednesday 7. 182 day and 364 day TB are auctioned every alternate week on Wednesdays. 8. RBI announces the exact date of auction, the amount to be auctioned and payment dates by issuing press release prior to every auction. 9. TB auctions are held on the NEGOTIATED DEALING SYSTEM (NDS)

IMPORTANCE, BENEFITS OR ADVANTAGES OF TB Source of Short-Term Funds Cheap Source of Finance Safety Liquid Instrument

5. Ideal Short-Term Investment 6. Eligible Securities for Statutory Liquidity Requirement 7. Tool of Monetary Policy 8. Used as a Hedging Instrument

LIMITATIONS OR DEMERITS OF TB Low yield Lesser number of competitive bids Not much of active trading

Steps taken to Promote Bill Market in INDIA Stepsb taken to

The importance of a good bill market scheme was recognised by the RBI in 1952, when it introduced the bill market scheme. Since then, a number of measures have been taken to promote the Bill Market.

1. The Bill market Scheme,1952: RBI introduced the bill market scheme by undertaking to provide funds to commercial banks against trade bills within prescribed limits. The scheme became popular with commercial banks, especially during the Busy season. The scheme failed to serve the purpose beyond refinance to commercial banks. The reason was lack of sufficient number of dealers.

2. The new bills market scheme, 1970 : A committee headed by M. Narsimham went into the question of developing a genuine bill market. On the recommendations of the Committee a NEW Bill Market Scheme was introduced in 1970. It was essential for making bank rate an effective methods of monetary control. After introduction of the scheme, RBI has been encouraging use of Bills as a source of Finance by imposing charges on alternatives methods like CASH CREDIT.

3.Working group on cash credit system (1993) : Headed by R. Jilani. Also recommended that steps should be taken to promote bill culture to a greater extent respective to both purchase and sales. Efforts should be made to persuade Govt. departments, public sector undertakings and large industrial units to accept bills drawn on them. The RBI discourages large use of cash credit.

4.Discount and finance house of India (dfhi) : The RBI set up DFHI jointly with the Public sector banks and all India financial institutions. With the objective of promoting Bill market in India. It provides ready market for commercial banks. It also acts as a specialised money market intermediary for trading in money market instruments. RBI provides REFINANCE facility to DFHI.

5.Re-Discounting of bills: The RBI permitted the license scheduled commercial banks to discount bills with some financial institutions like LIC, GIC and UTI. The discounting procedures were also simplified by dispensing with actual lodging of bills irrespective of face value below Rs 10 lakhs. The minimum amount of bills prescribed at Rs 5000 under the scheme was also withdrawn.

6. derivative USANCE PROMISSORY NOTE (DUPN) : For reducing the physical movement of paper and to facilitate multiple rediscounting, the RBI introduced an instrument called DUPN. These DUPNs are sold to investors in convenient lots of maturities ranging from 15 days to 90 days on the basis of genuine trade bills discounted by banks.

7.REMISSION OF STAMP DUTY: The Govt. of India also announced the remission of stamp duty on bills drawn on or in favour of a commercial bank or a cooperative bank Payable not more than Three months after date or sight. DUPNs were also exempted from payment of stamp duty.

8. DELINKING INTEREST RATES : The RBI delinked interest rates applicable on discounting of bills from prime lending rates of banks. It gave commercial banks the freedom to charge market determined interest rates on bills.

TREASURY BILLS MARKET : { Meaning and Features }

Meaning Treasury bills market refers to the market where treasury bills are bought and sold. A treasury bill is a short-term govt. paper or a promissory note issued by the central govt. The duration of these bills does not exceed one year. And no fixed rate of interest is payable. Treasury bills are purely finance bills as they do not arise out of any trade transactions. Thus these are different from commercial bills. The purpose of issuing treasury bills is generally to meet the temporary govt. requirements of FUNDS.

Features Treasury bills are short term borrowing instruments of the Central govt. Treasury bills are safest money market instruments. Treasury bills are different from commercial bills. Treasury bills are purely finance bills and do not arise out of any trade transactions. Treasury bills are issued only by Central Govt. through the RBI.

Treasury bills are available both in primary as well as secondary market. Treasury bills are sold through a process of Bidding at auctions. Treasury bills are zero risk instruments, the returns on these instruments is not very attractive. Treasury bills are issued at discount, i.e., at a price less than the face value. The govt. pays the specific amount (face value) on maturity of the bill.

Types of treasury bills In India, treasury bills are basically of two types : Ordinary or Regular. (b) Adhoc known as Adhocs.

(a) Ordinary or Regular treasury bills . These are issued to the public or other financial institutions through a process of auction or bidding for meeting the short term financial requirements of the Central Govt. The bids are invited for 91 days, 182 days, 364 days, treasury bills. These bills are easily marketable and can be bought and sold from the secondary market also. The ordinary treasury bills can also be discounted with RBI.

(b)Adhoc known as Adhocs treasury bills. These are always issued in favour of RBI with a view to replenish Govt’s cash balances by employing temporary surpluses of state govt. and semi-state govt. These bills are not sold through tender or auction. They are purchased by the RBI who is authorised issue currency notes against them.

On the basis of time duration:- Three categories : 91 days treasury bills. 182 days treasury bills. 364 days treasury bills.

Participants in the Treasury Bills Market : The following are the major participants of the treasury bills market :- Reserve Bank of India. State Bank of India and other Commercial Banks. State Govts. Financial institutions such as LIC, UTI, NABARD etc. Discount and Finance House of India (DFHI). Public. Provident funds. Dealers.