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Unit 3: Financial Markets

3.5.5 Bill Market Notes

Bill market is a market where short-term papers or bills are traded. These bills include bills of
exchange and treasury bills. The Bill market in India has not been as well developed as in the
U.S. and the U.K.
In its efforts to develop and activate the bill market, the RBI launched Bill Market Scheme in
1952. According to this scheme, the RBI provided advances to scheduled banks by way of demand
loans against the security of eligible usance bills or promissory notes of their constituents. The
facility was originally restricted to banks with deposits of ` 10 crores or more, which was later
in 1953 extended to banks with deposits of ` 5 crores or more. In July 1954, all licensed scheduled
banks became eligible for the facility. Initially, the minimum limit of advance was fixed at ` 25
lakhs and the minimum amount of each individual bill was fixed at ` 1 lakh. These minimum
limits were subsequently in 1957 reduced to ` 5 lakhs and ` 50,000 respectively.
Initially, refinance facility under the Scheme was granted at a concessional interest rate, i.e., at a
rate half a per cent below the bank rate. The RBI also agreed to bear half the cost of stamp duty
incurred in converting demand bills into time bills. However, the concessions were reduced in
stages after 1952 and they were all withdrawn by November 1956.
In October 1956, the scheme was extended to cover export bills so as to enable banks to extend
credit facilities to exporters on or more liberal basis.

However, the Bill Market Scheme, 1952 failed to achieve its objectives and was withdrawn in
1970.
A number of reasons are ascribed to its failure. These are:

1. Borrowers' preference for cash credits to discounting of bills.
2. High stamp duty.
3. Absence of specialised institutions for discharging the functions of acceptance and discount
houses.
4. Inadequate volume of usance bills.
5. Continuance of the old practice of drawing exports and import bills in foreign currency,
restricting the scope for negotiation such bills in the country.
6. Lack of bill discounting practice with banks having excess liquidity.
7. Inadequate mechanism for evaluating the creditworthiness of traders so as to avoid risk of
defaults of redemption on maturity of the bills.
8. Cumbersome procedures of discounting and rediscounting.
9. Loss of banks' interest in bill finance once the RBI granted refinancing against bills.
10. Growth of competing money market instruments such as interbank participants.

The RBI set up a study group under the Chairmanship of M. Narsimham to look into the forces
hampering the growth and development of a healthy bill market in the country and suggest
suitable measures. On the recommendations of the study group, the RBI introduced another Bill
Market Scheme in 1970. This scheme was a major step towards developing a bill market.
Under Bill Market Scheme, 1970, the RBI provided facility of rediscounting of the bills to the
eligible banks including scheduled commercial banks, selected urban cooperative banks, Export-
Import Bank of India, LIC, Mutual fund, and SIDBI were also eligible to rediscount bills under
the scheme.

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