Bill Financing – Historical Perspective
Commercial Bill, which had its origin in Europe is an early medieval financial innovation evolved over centuries – from a personal bond executed by debtor before a Court or a public notary to its present form of a commercial financial instrument - acquiring at various stages of evolution its distinctive characteristics of easy transferability and negotiability, and thus lending itself to discounting by banks to provide liquidity to the holder. With the rapid growth in international trade, bill became the principal instrument of settlement in international trade. In India, too, indigenous bankers and other …show more content…
The Group, under one of its terms of reference, also examined the role and scope of introducing ‘Banker’s Acceptance’ (BA) facility in the Indian Financial Markets.
BA has been in use in markets like USA and Europe primarily in financing international trade. Historically, BA backed by Trade Bills had readily available discount windows like the Discount Houses in the U.K. and the Central Banks like the Bank of England and Fed Reserve.
BA is a time draft or bill of Exchange drawn on and “accepted” by a bank as its commitment to pay a third party. The parties involved in a banker’s acceptance are the Drawer (the bank’s customer - importer or exporter), the Acceptor (a bank or an Acceptance House), the Discounter (a bank which could be the accepting bank itself or a different bank or a discount house) and the Re-discounter (another bank, discount house or the Central Bank). A “BA” is accepted, when a Bank writes on the draft its agreement to pay it on maturity. The Bank becomes the primary obligator of the draft or bill of exchange drawn on and accepted by it. In effect, BA involves substituting bank’s creditworthiness for that of a borrower. The accepted bill bears an irrevocable, unconditional guarantee of a bank to pay the bill on maturity, in the process creating a negotiable instrument that is also attractive to investors in short term paper. BA