Discounting Bill of Exchange

Discounting Bill of Exchange and Overdraft Facility Provided by a Commercial Bank

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There are various facilities provided by a commercial bank. Overdraft facility and discounting bills of exchange are among those facilities.

OVERDRAFT FACILITY

An overdraft is an advance given by allowing a customer keeping current account to overdraw his/her current account up to an agreed limit. It is a facility to a depositor for overdrawing the amount than the balance amount in his account. Depositors of current account make an arrangement with the banks that in case a cheque has been drawn by them which is not covered by their deposit in the bank, then the bank should grant an overdraft and not cancel it.

The security for an overdraft is generally financial assets like shares, debentures( they are almost similar to a bond), insurance policies of the account holder etc.

  • An overdraft is made without any security in the current account.
  • In the case of a loan, the borrower has to pay interest on full amount  sanctioned but in the case of overdraft, the borrower is given the facility of borrowing only as much as he requires.
  • A customer of an overdraft pays interest on daily balance.

DISCOUNTING BILLS OF EXCHANGE

A bill of exchange is a document acknowledging an amount of money owed in consideration of goods received. It is a paper signed by the debtor and the creditor for fixed amount payable on a fixed date.

Example: suppose A buys goods from B, h may not pay B immediately instead give B a bill of exchange stating the amount of money owed and the time when A will settle the debt. Now, B is in need of money immediately, so he will present this bill to the bank for discounting. The bank will deduct its commission and pay B the present value of the bill. When the bill matures after specified period, the bank will get payment from A.

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