The Bill Rediscounting Scheme (BRDS) is an important mechanism in the Indian financial system that helps banks manage their liquidity and provides short-term funds based on genuine trade transactions. The scheme is closely linked with the commercial bill market, which is a vital part of the money market.
In simple terms, BRDS allows banks to rediscount trade bills with other banks or financial institutions before their maturity and get immediate funds. This improves liquidity in the banking system and promotes the use of bills instead of cash credit.
Meaning of Bill Rediscounting
A bill of exchange is a written instrument drawn by a seller on a buyer, directing the buyer to pay a certain amount on a specified future date. When a bank purchases or discounts such a bill before maturity, it is called bill discounting.
When the bank that has already discounted a bill further sells or discounts it with another bank or institution, it is known as bill rediscounting. The scheme that facilitates this process is called the Bill Rediscounting Scheme.
Thus, BRDS enables banks to convert their bill assets into cash whenever required.
Background and Introduction of BRDS in India
The Bill Rediscounting Scheme was introduced in India in 1970 by the Reserve Bank of India (RBI). The main objective was to develop a vibrant bill market and reduce excessive dependence on the cash credit system.
Before BRDS, Indian banks relied heavily on cash credit and overdraft facilities, which led to inefficient credit management. The RBI wanted to encourage self-liquidating, short-term credit through bills arising out of genuine trade transactions.
Objectives of Bill Rediscounting Scheme
The main objectives of BRDS are:
- To provide liquidity support to banks
- To promote the use of trade bills in financing business activities
- To develop an active and efficient money market
- To reduce the over-dependence on cash credit system
- To improve credit discipline in the banking system
These objectives are very important from the JAIIB and CAIIB exam point of view.
How the Bill Rediscounting Scheme Works
The working of BRDS can be understood in a simple step-by-step manner.
First, a seller sells goods to a buyer and draws a bill of exchange on the buyer. The buyer accepts the bill, agreeing to pay on a future date. The seller then approaches a bank and gets the bill discounted, receiving funds immediately after deducting discount charges.
If the bank later needs funds before the bill matures, it can rediscount the same bill with another bank or financial institution under the BRDS. The rediscounting institution pays the bank and holds the bill till maturity.
On maturity, the bill amount is collected from the buyer, and the rediscounting institution receives payment.
Participants in the Bill Rediscounting Scheme
The BRDS involves multiple participants, each playing a specific role.
- Commercial banks
- Cooperative banks
- Financial institutions
- Reserve Bank of India (earlier, directly)
- Discount and finance houses
These participants ensure smooth flow of funds and liquidity in the market.
Types of Bills Eligible Under BRDS
Only genuine trade bills arising from actual sale of goods are eligible under the scheme. These bills must represent real commercial transactions.
The eligible bills generally include:
- Bills arising from sale of goods
- Short-term bills with maturity up to 90 days
- Usance bills accepted by reputed buyers
Accommodation bills or bills without genuine trade backing are not eligible.
Role of RBI in BRDS
Initially, RBI directly participated in the rediscounting of bills. Over time, RBI shifted its role to that of a regulator and facilitator rather than a direct participant.
RBI issued guidelines regarding:
- Eligible instruments
- Participants
- Margin requirements
- Interest rates and rediscounting norms
The objective of RBI has been to strengthen the bill market and ensure financial stability.
Benefits of Bill Rediscounting Scheme
The Bill Rediscounting Scheme offers several advantages to the financial system.
For banks, it provides:
- Easy access to short-term funds
- Better liquidity management
- Diversification of assets
For businesses, it:
- Ensures timely availability of working capital
- Encourages discipline in payments
- Reduces dependence on cash credit
For the economy, BRDS:
- Promotes efficient credit allocation
- Strengthens the money market
- Improves transparency in trade finance
Limitations of BRDS in India
Despite its advantages, the Bill Rediscounting Scheme has not developed as expected in India.
Some major limitations include:
- Preference for cash credit system by banks and borrowers
- Limited acceptance of bills in trade practices
- Procedural complexities
- Risk perception by banks
- Lack of a deep and active secondary bill market
Because of these issues, the bill market in India remains underdeveloped compared to advanced economies.
Difference Between Bill Discounting and Bill Rediscounting
Bill discounting refers to the first sale of a bill by a business to a bank. Bill rediscounting refers to the subsequent sale of that discounted bill by a bank to another institution.
In simple words, discounting is done by businesses, while rediscounting is done by banks.
Conclusion
The Bill Rediscounting Scheme is a significant tool in the Indian money market that aims to promote bill financing and improve liquidity in the banking system. Though introduced with strong objectives, its growth has been limited due to structural and behavioral issues.