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Law Relating to Bill of Finance JAIIB: The IIBF will conduct the second cycle of the JAIIB exam in November. The dates are the 12th, 13th, and 20th of November 2022. Candidates should make use of short notes to revise the JAIIB syllabus as the exam draws closer. In this blog, we’ll provide notes on Law Relating to Bill of Finance. This will cover the most essential points relating to Bill of Finance. These will be types, features, etc. Candidates can download the free e-book of these notes for easy reference.

Law Relating to Bill of Finance JAIIB

Law Relating to Bill of Finance: Overview

We have given thorough notes for the JAIIB Exam here. So, here is “Unit 9: Law Relating to Bill finance” from “Module B” from “Paper 3: Legal & Regulatory Aspects of Banking.”

Bill financing is one of the ways a bank can lend money. When compared to other forms of financing, bill finance allows a banker to lend quickly. Bill financing is the discounting or purchase of commercial invoices arising from the sale of products.

When opposed to cash credit and overdraft, bill financing provides the following advantages:

  • The transactions that support them are easily recognizable.
  • There is concrete evidence of repayment.
  • If the bill is on a usage basis, it will have many signatures.
  • It is a readily transferrable asset that banks can rediscount to boost the bank’s liquidity in the event of a necessity.

Classification of Bills

Inland Bills

The lender can draw or manufacture these bills in India. The borrower can be any individual residing in India and the bill would be payable by them. The bills can also be payable in another nation. An inland bill is a bill of exchange that the lender draws or prepares in one nation and can be payable in another country’s jurisdiction.

According to Section 11 of the Negotiable Instruments Act of 1881, bills of exchange, including cheques/promissory notes, that a seller/lender draws or makes in India and is payable or is drawn on any person living in India, are inland bills of exchange (can also be inland cheques or inland promissory notes depending on the case).

According to the preceding description, an ‘Inland Bill’ refers to the following categories of bills.

  • The bill was prepared and paid in India.
  • The bill was drawn in India and drawn on an Indian resident, whether due in India or elsewhere.
  • The bill was written in India on a person who lives outside of India yet is due in India.
  Inland bill Examples:
  • A seller in Mumbai draws a bill on a customer in Bengaluru and it is payable in Delhi.
  • A seller in Chennai prepares a bill on a buyer in Washington (US) but it is payable in Mumbai (India).
  • A vendor in Jaipur (India) writes a bill to a buyer in Hyderabad (India) but the bill is payable in Sydney (Australia).

Foreign Bills (Section 12 NI Act)

Bills made outside India and made payable to or drawn on any individual located in any nation other than India / resident in India. A foreign bill is not an inland bill. Foreign bills of exchange include the bills listed below.

  • A bill that is drawn and payable outside of India.
  • A bill made outside of India but payable in India
  • A bill made outside of India on someone staying outside of India
  • A bill made outside of India on a resident of India

To reduce delays, lenders often draw international bills in three sets, each of which is a ‘via’ and delivered to the drawee by three separate means of mail services. On the payment of one set, the other two become inactive.

Clean Bills

A clean bill is a bill of exchange in accordance with the provisions of the NI Act that does not have papers of title to goods. A clean bill is a document of title to goods that is not complemented by a bill of exchange (for example, LR/RR/BL/Airway bill). Clean bills show that the drawer has delivered the products straight to the buyer/drawee. The drawee can pay a Clean bill immediately or at a later date.

Documentary Bills

A bill of exchange that is accompanied by title documentation for items. Drawers can use these invoices to claim the cost of products that they have delivered. A seller issues Documentary bills when a bill of exchange is accompanied by an airway bill/bill of lading, L/R, dock receipt, warehouse receipt, dock warrant, or other document demonstrating the dispatch of goods to the buyer, as well as an order for the delivery of goods (document of title to goods). The documentary charge may be due immediately or at a later date.

Demand Bills

Such demand payment instruments do not mention the time or time limit of payment. Another name for a demand bill is a sight bill. A drawer writes a demand bill when the drawee has to make the payment on demand. Demand bills are bills that are drawn due upon sight or on presentation and have no time limit for payment.

Usance Bills

Usance bills are those that may be payable at a particular future date. These bills have phrases like ‘after date’ or ‘after sight. ‘After date’ implies that the due date for repayment of the bill will be computed from the bill’s date. ‘After sight’ signifies that the bill’s due date will be computed from the date of presentation to the drawee for acceptance.

A bill indicated to be payable at a future date matures on the third day following the due date, according to Section 22 of the NI Act. These three days is a grace period for the drawee to pay the bill. Three days after the date of payment mentioned on the bill, the drawee has to pay. However, in some cases, a grace period may not be provided. In this case, the drawee has to pay the bill on that particular day without a grace period. Terms used to indicate lack of grace period- ‘no grace’, ‘without grace’, ‘fixed’.

Accommodation Bills

Genuine bills or bonafide bills are bills that occur as a result of legitimate commercial transactions. However, when someone lends his name and signs a bill as a drawer (seller), acceptor (drawee/buyer), or endorser without getting the amount of the bill, such bills will be accommodation bills. House bills/accommodation bills are typically drawn on one another by group concerns to borrow from banks without real transactions.

Cheque

A cheque is a type of bill of exchange with several differences. A cheque is always drawn on a banker and the banker has to pay on demand, whereas other bills of exchange can be due for payment after a certain length of time.

Bills are drawn with an instruction to deliver against payment/D.P Bills

In a supply of goods transaction, a seller draughts a bill on the buyer and delivers it to his banker along with a bill of lading or other evidence of ownership of the items. When the buyer pays the price of the items, the seller tells the banker to provide the bill and title paperwork.

Bills are drawn with instructions to deliver against acceptance/D.A Bills

A usance bill backed up by a document of title to commodities with the directive that the papers can be supplied if the buyer accepts the bill of exchange.

Negotiable Instrument Act 1881

In 1881, the British passed the Negotiable Instrument Act to facilitate the expansion of banking and commercial activities. The primary goal was to make the system of negotiable instruments lawful. The Act came into effect during British control, and the majority of its provisions have remained unmodified to this day. The Ministry of Finance is the nodal agency in charge of overseeing the system of negotiable instruments.

The negotiable instrument is the process of transferring monetary value from one individual to another using legal documents. The legal definition of negotiable is something that one can transfer from one party to another by delivery, with or without the endorsement, so that the title passes to the transferee.

SectionDescription
5“Bill of exchange” is described as “a document in writing containing an unconditional order signed by the creator instructing a specific person to pay a given quantity of money solely to, or to the order of, a certain person or the bearer thereof.”
7Drawer, Drawee and Payee
8A person allowed in his name to possess the bill and reclaim the money presented by Bill is referred to as a holder of the bill of exchange.
9“Holder in Due Course” means anybody who obtains possession of a bill in exchange for a fee.
10“Payment in Due Course” implies timely payment to the holder or holder in line with the tenor of the bill of exchange in good faith and without neglect.
14“Negotiation”: Negotiation occurs when a bill is passed to a person for him to be able to claim the amount indicated by the bill.
15“Endorsement”: Endorsement occurs when the holder of an instrument signs a bill of exchange to transfer it.
19Demand Bills
30Liability of Drawer
32Liability of Acceptor/Drawee of Bill
35Liability of Endorser
79Interest rate specified
80Interest when no rate is specified

Various Types of Bill Finance

Bill Purchase

This is a service that allows a bank to negotiate invoices on demand, whether they are clean or dirty. Bill purchase is comparable to bill discounting in that both have the same effect on the balance sheet. It’s also for companies who need a quick cash injection and wishes to use their unpaid invoices as collateral. They sell the invoices at a reduced cost to a financial institution known as a factor.

Companies might spend these funds to meet working capital requirements, pay vendors, or launch a new business endeavor. The financial institution retains the authority to reclaim receivables from the business’s consumers, which makes bill buy distinctive. Once a company purchases a bill and receives payment from a financial institution, it loses control over how the latter collects the invoice amount from clients.

Bill Discount

When bills of exchange are payable after a certain period, such as bills payable on demand, the banker extends this service. Bill discounting is a trade-related process in which a firm sells to a financier its unpaid bills that are expected to be paid at a later period (a bank or another financial institution).

Bill discounting is a method of obtaining short-term financial help and maintaining working capital by discounting outstanding bills. Another name for this is Invoice Discounting. The Negotiable Instruments Act of 2010 governs this process. On the TReDS platform, there are two techniques for discounting a bill: factoring and reverse factoring. Both techniques help boost cash flow while minimizing the impact on the balance sheet.

Advance against Bills for Collection

This service is an advance against bills for collection when a bank advances against bills that are in the process of collection. Rather than filing export bills for discount or purchase, the exporter might have them routed to the foreign buyer for payment collection. In this case, the bank provides an advance on a part of the collection bills to the exporter. When the importer pays, the exporter receives the amount as post-shipment credit. Exporters employ this option when there are differences in invoices they draw under the letter of credit.

Law Relating to Bill of Finance JAIIB: Conclusion

We hope that this note has given you a thorough understanding of the JAIIB Exams Law Relating to Bill finance. If you have any queries, please comment below.

Law Relating to Bill of Finance JAIIB: FAQs

Are letters of credit contingent liability?

It would be entirely dependent on future events. For example, if a buyer is unable to make a payment to the bank, the bank must absorb the expense and arrange it on the buyer’s behalf.

Is a letter of credit a negotiable instrument?

A letter of credit is a negotiable instrument since the bank deals with the paperwork rather than the products, and the parties can transfer the transaction with consensus.

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