Financial ManagementBill Discounting & Factoring

Prepared By:-

Ojal Mistry (01)

Divya Bajaj(31)

Dimpi Mehta(33)

Krutika Maiwala (35)

Madhvi Mehta(49)

Meaning of Bill Discounting:

Trading or selling a bill of exchange prior to the maturity date at a value less than the par value of the bill. The amount of the discount will depend on the amount of time left before the bill matures , and on the perceived risk attached to the bill.

Types of Bills:

Demand BillUsance Bill Documentary Bills

D/A Bills

D/P BillsClean bills

Creation of a Bill of Exchange(B/E)

Suppose a seller sells goods or merchandise to a buyer. In most cases, the seller would like to be paid immediately but the buyer would like to pay only after some time, that is, the buyer would wish to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity on the buyer. The seller has assumed now the role of a creditor; and is called the drawer of the bill. The buyer, who is the debtor, is called the drawee. The seller then sends the bill to buyer who acknowledges his responsibility for payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be by the buyer himself or any third party willing to take on the credit risk of the buyer.

Advantages

To InvestorsTo banks Discount Rate and Effective Rate of Interest

Bill Financing - Historical Perspective

OriginHundies and Bill of ExchangeVarious committees appointed by Government of india and

reserve bank of indiaCentral Banking Enquiry Committee and Bill Market SchemeNew Bill market scheme

Present Position of Bills Discounting

The Jankiraman CommitteeBanks have been providing bill finance outside the consortium

without informing the consortium bank-ers; The rediscounting of bills by finance companies with banks

was done at a much lower rate of interest; No records regarding bill discounting were ever maintained by

banks.They have been drawing bills on companies and they

themselves discounted such bills to avail of rediscount facilities;

RBI issued guidelines to banks

Bill finance should be a part of the working capital credit limit;

No fund/non-fund based facility should be provided by banks outside the consortium arrangement;

Accommodation bill should never be discounted;Funds accepted by banks for portfolio management should not

be deployed for discounting bills.

Bill Financing, has not been able to even partially substitute cash credit.

In India, the major reason cited for the non-development of bill financing is the hesitation of the industry and trade to subject themselves to the rigours of bill discipline.

Operational and procedural hassles currently obtaining in banking system too are said to impede the growth of bill financing even amongst those business segments where it has found acceptance.

Meaning of Factoring “Factoring means an arrangement between a

factor and his client.

CLIENTCUSTOME

R

FACTOR

Characteristics of FactoringCredit AdministrationCredit Collection and ProtectionFinancial AssistanceOther Services

Difference Between Bill Discounting & Factoring• Services• Advances and Purchases• Responsibility• Rediscounting• Recourse• Transaction Orientation• Recording • Confidentiality

Modus OperandiFactoring AgreementPreparation of invoicesDispatching of goodsAssignment of debt dueHandling of InvoicesPayment by the Factor

Types of FactoringFull service FactoringWith Recourse FactoringMaturity FactoringBulk FactoringInvoice FactoringAgency FactoringInternational FactoringSuppliers Guarantee Factoring

Limited FactoringBuyer Based FactoringSeller Based Factoring

Costs of FactoringThe factoring commission or service feeThe interest on advance granted by the factor to the firm

Benefits of FactoringFactoring provides specialized services in credit management,

and thus, helps the firm’s management to concentrate on manufacturing and marketing.

Factoring helps the firm to save cost of credit administration due to the economies of scale and specialization,

Through factoring, firms can improve their cash flow through prepayment facilities up to a certain percentage (80-90 percent) of the value of the assigned invoices as and when necessary

Functions of Factoring

1. Administration of sales Ledger

2. Provision of collection facility

3. Financing trade debts

4. Credit Control and credit protection

5. Advisory Services

Factoring in Indiafactoring services have been introduced since

1991 in India In India for the first time, the Vaghul

Committee which submitted its report on the Money Market, recommended the development of a system of factoring of open account sales particularly for the small scale industrial units.

Later, the Kalyaansundaram Committee found an abundant scope for such services and hence strongly advocated for the introduction of factoring services in India.

Subsequently a suitable amendment was made in the Banking Regulation Act 1949

the RBI permitted both the State Bank of India and Canara Bank to start factoring services through their own subsidiaries

SBI Factors and Commercial Services Ltd. and Can bank Factors Ltd; sponsored by the State Bank of India and Canara Bank respectively, commenced operations in 1991

In 1993 the RBI allowed all the scheduled commercial banks to introduce factoring services either departmentally or through a subsidiary set-up

there are a few NBFCs such as Formost Factors Ltd. , Global Trade Finance Pvt. Ltd. (a subsidiary of EXIM Bank) and Integrated Financial Services Ltd., which are also in the business of factoring in India

Besides these NBFCs, SIDBI, Honkong and Shanghai Banking Corporation have been offering factoring services to their clients.

MAJOR PLAYERS OF FACTORING IN INDIA

Bibliography

Internet:http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/16088.pd

fhttp://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=1659http://www.psnacet.edu.in/courses/MBA/Financial%20services

/7.pdfhttp://www.languages.ind.in/factoring.htmBooksFinancial services by “M.Y. Khan” Financial Market and Services by “Gordon Natarajan”Financial services and system by “K. Sasidharan and Alexi K

Mathews”