Question

Explain the following term/concept:
Discounting of Bills

Answer 1

(1) Banks offer financial assistance to commerce and industry through discounting bills of exchange and promissory notes. A creditor holding a bill of exchange duly accepted by his debtor can discount it at a bank. The bank pays the amount of the bills after deducting some nominal amount as a discount. This discount represents the interest on the amount for the unexpired or the remaining period of the bill.
(2) On maturity, the bank collects the proceeds of the bill from its acceptor. If the bill of exchange is dishonored, the customer of the bill of exchange along with interest expenses, etc. Sometimes, a banker who discounted the bill of exchange is liable to pay to the bank the whole amount themselves accept hundies on behalf of the customers and arrange to pay for the bill of exchange on maturity. This facility helps traders in securing ready money for their day-to-day business.