Commercial Bill: Features, Advantages and Disadvantages

A commercial bill is also referred to as a bill of exchange or bill discounting. It is a short term, negotiable, and self-liquidating money market instrument.

what is the Commercial Bill
what is the commercial bill

Bill discounting is a major activity with some of the smaller banks.

Under this type of lending, the bank takes the bill drawn by the borrower on his (borrower’s) customer and pays him immediately deducting some amount as discount/commission.

The bank then presents the bill to the borrower’s customer on the due date of the bill and collects the total amount.

If the bill is delayed, the borrower or his customer pays the bank a predetermined interest depending upon the terms of the transaction.

Features of Commercial Bill

The main features of a commercial bill are as following:

1. It Must be in Writing

The commercial bill must be in writing.

21 Advantages and Disadvantages of Commercial Banks.

2. Order to Pay

There must be an order to pay. It is of the essence of the bill that its drawer orders the drawee to pay money to the payee.

The term order does not mean command. Any request or direction or other words, which show the intention of the drawer to cause a payment being made by the drawee is sufficient.

Politeness may be admissible but excessive politeness may prompt one to disregard it as an order.

3. Unconditional Order

This order must be unconditional, as the bill is payable at all events. It is absolutely necessary for the drawer’s order to the drawee to be unconditional.

The order must not make the payment of the bill dependent on a contingent event.

A conditional bill of exchange is invalid.

4. Signature of the Drawer

The drawee must sign the instrument. The instrument without the proper signature will be inchoate (unclear or unformed or undeveloped) and hence ineffective.

It is permissible to add the signature at any time after the issue of the bill.

5. Drawee

A bill, in order to be perfect, must indicate a drawee, which should be called upon to accept or pay it.

Related: Key Factors that Affecting Investment Decisions of Investors.

6. Parties

The drawer, the drawee (acceptor), and the payee the parties to a bill are to be specified in the instrument with reasonable certainty.

7. Certainty of Amount

The sum must be certain.

8. Payment in Kind is Not Valid

The medium of payment must be money and money only.

The distinctive order to pay anything in kind will vitiate the bill.

9. Stamping

A bill of exchange, to be valid, must be duly stamped as per the stamp act.

10. Cannot be Made Payable to Bearer on Demand

A bill of exchange as originally drawn cannot be made payable to the bearer on demand.

Parties to a Commercial Bill

There are three parties to a bill of exchange as under:

  1. Drawer: The person who draws a bill of exchange is called the drawer.
  2. Drawee: The person on whom the bill of exchange is drawn is called the drawee. he is also called as an acceptor of the bill.
  3. Payee: The person named in the instrument to whom or to whose order the money is directed to be paid by the instrument, is called the payee.

Related: Users of Financial and Accounting Information.

Advantages of Commercial Bill

Commercial bill market is important for trade and industry and also for the development of the money market in the following ways:

1. Ideal Source of Credit

Bill financing is considered to be the most common method of meeting the short term credit needs of trade and industry.

It is quite possible for even banks to rediscount the bills in their possession.

In this manner, banks are able to meet their short term liquidity requirements.

2. High Liquidity

The level of liquidity of commercial bills is very high.

This advantage emanates from their self-liquidating character.

Such bills have a fixed and short tenure of maturity. They can be easily discounted.

3. Financial Discipline

As the payment must be made on the due date of the bill, the use of commercial bills as an instrument of credit imposes financial discipline on the borrowers.

4. Ideal Parking of Funds

Discounting of bills offers an excellent avenue for short term investments of the funds of banks.

The existence of a bill market enables banks and other financial institutions to park their surplus funds profitably by selecting appropriate maturities.

5. Flexibility

An important function of an efficient bill market is that it imparts flexibility to the money market by functioning as its effective constituent.

The bill market helps ease out liquidity crunch in the banking system.

6. Existence of Intermediaries

There should be available an adequate number of intermediaries such as commercial banks, other financial institutions, or acceptance house facility for acceptance of bills at a low cost.

This will considerably reduce the risk of default.

The intermediaries are expected to ensure the smooth functioning of the bill market.

7. Credit Information

Adequate information must be available to judge the creditworthiness of different parties.

Credit investigating agencies play an important role in investigating and obtaining vital and credible information about the parties involved in the bill market.

What is the Capital Asset Pricing Model and Its Assumptions?

Disadvantages of Commercial Bill

There are many reasons as to why the bill market remains in a state of underdevelopment. They are briefly explained below:

1. Lack of Bill Culture

The trade and industry and government departments are reluctant to move towards the bill culture, which requires the observance of strict financial discipline, particularly on the part borrowers.

commercial bill advantages and disadvantages
commercial bill advantages and disadvantages

This hinders the growth of the bill market.

Derivatives: Meaning, Functions, Types, Pros, and Cons.

2. Stamp Duty

In respect of transactions involved in making of bills of exchange there us a necessity of affixing stamp on each bill.

Many a time, stamp papers of the required denomination are not available.

Besides, the amount of stamp duty is also high.

3. Inadequate Credit Rating

The credit rating is of recent origin. Services of specialized and expert credit investigating agencies are not adequately available so as to facilitate valid judgment about the credibility of the parties concerned.

Further, the credit rating has also become expensive.

4. Absence of Active Secondary Market

The secondary market for bills is an important requirement for the development of an efficient bill market.

Facilitates such as rediscounting, etc., available only with the apex level financial institutions, thus curtailing the size of the bill market.

Further, the bill acceptance service in the commercial bill market has been very much restricted.

5. Administrative Problems

There are many administrative problems, which are faced by players in the bill market.

These include physical scrutiny of invoices accompanying bills to ensure that they are trade-related, physical presentation of bills for repayment ad requirement of physical endorsement, and re endorsement of bills at the time of rediscount.

Different Types of Bonds – Which is the Best Investment Bond for You.

6. Limited Foreign Trade

Whereas a bill market is required to be constituted for the purpose of financing foreign trade, it is unfortunate that the development in the volume of international trade transactions is relatively small and restricted.

For example, in India, foreign trade as a percentage to national income has always remained small which has contributed to the small size of the bill market.

7. Lukewarm Government Support

There has been lukewarm support from the government in encouraging the practice of bill financing.

A large part of the trading activity at the government level in India is carried on through public sector units like STC, MMTC, FCI, etc.

Unfortunately, the government does not prefer financing its activities through commercial bills.

Recommended for You:

Scroll to Top