"Bills discounting may be identified as an important instrument for business development." Comment on this statement and also elaborate its procedure.

Bill Discounting is a short tenure financing instrument for companies willing to discount their purchase / sales bills to get funds for the short run and as for the investors, it is a good instrument to park their spare funds for a very short duration. It serves as a mean of working capital requirements for businesses. The advantages of bills discounting to banks and finance companies which are as follows: Safety of Funds: The greatest security for a banker is that a bill of exchange is a negotiable instrument bearing signatures of two parties considered good for the amount of bill; so it can enforce its claim. Certainty of payment: A bill of exchange is a self liquidating asset with the banker knowing in advance the date of its maturity. Thus, bill finance obviates the need for maintaining large, unutilized, ideal cash balances as under the cash credit system. It also provides banks greater control over their drawals. Profitability: Since the discount on a bill is front ended the yield is much higher than in other loans and advances, where interest is paid quarterly or half yearly. Evens out Inter-bank Liquidity Problems: The development of healthy parallel bills discounting market would stabilize the violent fluctuations in the call money market as banks could buy and sell bills to even out their liquidity mismatches. When an investor and the company agree to a particular bill discounting transaction, the following is what the company gives to the investor: The original copies of bills to be discounted; A hundi / promissory note; Post Dated Cheque (PDC). The investor simply has to issue a cheque. The amount of cheque is arrived at after deducting the discount rate. The post-dated cheque that the company gives is of the full amount of the transaction. This can be better explained with an example as follows. Company A wants to discount its purchase bill of ₹2,00,000 for a period of three months. Investor P agrees to do so at a discount rate of 21%. The deal is mutually agreed. Now, the investor will issue a cheque of ₹1,89,500. This figure is arrived at as follows: = 2,00,000 - 2,00,000 x 21% x 3/12 Thus the investor gets his/her interest before the end of the period on discounting. The company on its part will issue a post-dated cheque of ₹2,00,000 for three months period. Here the investor benefits in two ways: He gets the interest element at the first day of issuing the cheque. i.e. he does not include that part in his cheque amount. Thus he can earn interest on this interest for a three-month period. Even a simple bank fixed deposit on it will earn @5% p.a. By investing ₹1,89,500 for three months, the investor earns ₹10,500 on it. A return of 22.16%.