Under this arrangement, the entire amount of borrowing is credited to the current account of the borrower or released in cash. The borrower has to pay interest on the total amount. The loans are repayable on demand or in periodic installments. They can also be renewed from time to time, As a form of financing loans imply a financial discipline on the part of the borrowers.
Bills Purchased Discounted
This arrangement is of relatively recent origin in India. With the introduction of the New Bill Market Scheme in 1970 by the Reserve Bank of India own. bank credit is being made available through discounting of bills by banks, The RBI envisaged the progressive use of hills as an instrument of credit as against the prevailing practice of using the credit arrangement for financing working capital. The arrangement gave rise to unhealthy practices. As the availability of bank credit was unrelated to production needs, borrowers enjoyed facilities in excess of their legitimate needs. Moreover, it led to double financing, this was possible because credit was taken from different agencies for financing the same activity. This was done, for example, by buying goods on credit from suppliers and raising cash credit by hypothesizing the same goods. The bill financing is intended to link credit with the sale and purchase of goods and, thus, eliminate the scope for misuse or diversion of credit to other purposes.
The amount made available under this arrangement is covered by the cash credit and overdraft limit. Before discounting the bill the bank satisfies itself about the creditworthiness of the drawer and the genuineness of the bill. To popularize the scheme, the discount rates are fixed at lower rates than those of cash credit, the difference being about 1-1.5 per cent, The discounting banker asks the drawer of the bill (i.e, seller of goods) to have his bill accepted by the draw (buyers) bank before discounting it. The latter grants acceptance against the cash credit limit, earlier fixed by it, on the basis of the borrowing value of stocks. Therefore, the buyer who buys goods, on credit cannot use the same goods as a source of obtaining additional bank credit.
The modus operandi of bill finance is a source of working capital financing is that a bill arises out of a trade sale purchase transaction on credit. The Seller of goods draws the bill on the purchaser of goods, payable on demand or after a usance period not exceeding 90 days. On acceptance of the bill by the purchaser, the seller offers it to the bank for discount purchase. On discounting the bill, the bank the funds to the seller. The bill is presented by the bank to the purchaser accepted of the bill on due date for payment. The bills can also be discounted with the other banks RBI. However, this form of, financing is not popular in the country.