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Indian Financial System

Notes According to the Indian Negotiable Instruments Act, 1881:
"The bill of exchange is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to, or to the order of,
a certain person, or to the bearer of that instrument."
The bill of exchange (B/E) is used for financing a transaction in goods which means that it is
essentially a trade-related instrument.

11.10.1 Rediscounting of Bills

Presently banks purchase/discount/negotiate bills under Letter of Credit (LC) only in respect
of genuine commercial and trade transactions of their borrower constituents who have been
sanctioned regular credit facilities by the banks. Banks could not, therefore, extend fund-based
credit facilities (including bills financing) to a non-constituent borrower or a non-constituent
member of a consortium/multiple banking arrangement.
Further, the practice of drawing bills of exchange clause 'without recourse' and issuing letters of
credit bearing the legend 'without recourse' is discouraged because such notations deprive the
negotiating bank of the right of recourse it has against the drawer under the Negotiable
Instruments Act. Banks therefore, do not open LCs and purchase/discount/negotiate bills bearing
the 'without recourse' clause.

Did u know? Reserve Bank of India (RBI) in notification to banks dated 3rd August 2007 has
advised that:
1. In cases where negotiation of bills drawn under LC is restricted to a particular bank,
and the beneficiary of the LC is not a constituent of that bank, the bank concerned
may negotiate such an LC, subject to the condition that the proceeds will be remitted
to the regular banker of the beneficiary. However, the prohibition regarding
negotiation of unrestricted LCs of non-constituents will continue to be in force.
2. The banks may negotiate bills drawn under LCs, on 'with recourse' or 'without
recourse' basis, as per their discretion and based on their perception about the credit
worthiness of the LC issuing bank. However, the restriction on purchase/discount
of other bills (the bills drawn otherwise than under LC) on 'without recourse' basis
will continue to be in force.

Self Assessment

Fill in the blanks:
7. Banks do not open LCs and purchase/discount/negotiate bills bearing the ..................
clause.
8. The bill of exchange is an instrument in writing containing an .................. order.
9. Factoring services like 'undisclosed factoring' are .................. in nature.

10. Factoring undertakes to .................. the bills of the client.
11. The forfeiting owes its origin to a French term .................. .
12. .................. may broadly be defined as the relationship, created an agreement, between the
seller of goods/services and a financial institution.

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