Bill Market in India: Types, Advantages and Defects of Bill Market Scheme!

Bill Market refers to the market for short-term bills generally of three months maturity. A bill is a promise to pay a specified amount by the borrower (drawer) to the creditor (drawee). Bills are of three types- (a) bills of exchange or commercial bills used to finance trade; (b) finance bills or promissory notes; and (c) treasury bills used to meet temporary financial needs to the government. These bills may be bought and sold in the discount market which consists of commercial banks, discount houses and other institutions.

The bill market plays an important role in the banking and monetary system of the country because of the following reasons:

(a) It helps to meet the short-term financial requirements of individuals, companies and the government.


(b) The commercial banks which have surplus funds can invest them profitably in these bills,

(c) The commercial bank can dispose of these bills easily or can get them rediscounted by the Reserve Bank of India whenever they require cash.

Keeping in view the usefulness of the bills as instruments of credit to both business and banks, their self-liquidating nature and easier regulation of banks’ bill finance by the central bank, the Reserve Bank of India has been making efforts to develop a bill market in the country.

Types of Bill Market Scheme:


I. Old Bill Market Scheme:

The bill market scheme was introduced by the Reserve Bank of India in January 1952. Under this scheme, the Reserve Bank undertook to advance loans to commercial banks against their demand promissory notes supported by the security of usance bills of their constituents or customers.

Before 1952, the practice was that the banks could secure additional cash from the Reserve Bank only by selling government securities to it.

But, now, according to the bill market scheme, a bank can grant loans to its customers against their promissory notes and can further use the same promissory notes to borrow from the Reserve Bank. All that the bank is required is to convert these promissory notes into usance promissory notes maturing within 90 days. Thus the bill market scheme aimed at widening the loan window of the Reserve Bank for the banks by allowing them to borrow even against their ordinary commercial credit after its conversion into eligible bills.


Initially, the bill market scheme was introduced on an experimental basis. It was restricted (a) to the scheduled banks with deposits of Rs. 10 crore and above- (b) for the loans with the minimum limit of Rs. 10 lakh; and (c) against the individual bills, the minimum value of each should be one lakh rupees.

Later on the scope of the scheme was broadened from time to time- (a) by making more banks eligible to borrow under the scheme; (b) by reducing the minimum eligibility value for bills- (c) by reducing the minimum limit of advances; and (d) by extending the scheme to export bills with the minimum usance of 180 days. Soon the bill market scheme became popular. The loans granted under the scheme increased from Rs. 29 crore in 1951-52 to Rs. 228 crore in 1955-56 and to Rs. 1354 crore in 1968-69.

The bill market scheme introduced in 1952 was in fact a pseudo bill market scheme. Its objective was not be develop a genuine bill market, but to provide extended financial accommodation to banks by the Reserve Bank. The scheme was not based upon the genuine trade bills, but on the conversion of loans and advances of the banks into usance bills.

The genuine bill finance imposes a discipline of making payments when due and involves the credit transactions supported with genuine trade transactions. The bill market scheme, on the contrary, evolved the cash credit system of bank lending which the borrowers of the bank found much more convenient elastic and to their liking ; the discipline of the bill finance was absent in such a system.

The Dehajia Committee report brought out the abuses of cash system and suggested the use of bill financing for the supervision of the funds lent by the commercial banks.

II. New Bill Market Scheme:

Dissatisfied with the old bill market scheme, in February 1970, the Reserve Bank of India constituted a Study Group under the chairmanship of Sh Narasimhan to go into the question of enlarging the use of bills of exchange as an instrument of credit and the creation of genuine bill market in India.

On the recommendations of the report of the study group, the Reserve Bank introduced the New Bill Market Scheme in November 1970 under Section 17 (2) of the Reserve Bank of India Act.

The main features of the New Bill Market Scheme are:


(i) All licensed scheduled commercial banks including the public sector banks will be eligible to offer bills of exchange to the Reserve Bank for rediscounting.

(ii) The bills covered under the scheme must be genuine trade bills relating to the sale or dispatch of goods.

(iii) The Reserve Bank rediscounts these bills. That is why the scheme is also called ‘Bills Rediscounting Scheme’. The rediscounting facility should be available at the Reserve Bank’s offices at Bombay, Calcutta, Madras and New Delhi. To avoid rediscounting of large number of small bills, such bills should be given in bunches.

(iv) The bill should be drawn on and accepted by the purchaser’s bank. If the purchaser’s bank is not a licensed scheduled bank, the bill should in addition bear the signatures of a licensed scheduled bank.


(v) The bills should have maximum usance of 90 days.

(vi) The bills should bear at least two good signatures.

(vii) The scheme does not cover the bills of exchange relating to the sale of goods to the government departments and quasi-government bodies as well as to statutory corporations to the sale of such commodities which are indicated by the Reserve Bank from time to time.

(viii) According to the modification of the scheme in 1971, the bills of exchange relating to the sale of goods to government departments and quasi government bodies as well as to statutory corporations have also been covered by the scheme.


(ix) With effect from April 1972, the bills of exchange drawn and accepted by the Industrial Credit and Investment Corporation of India (ICICI) were also made eligible for discount under the scheme.

Advantages of Developed Bill Market:

A developed bill market is useful to the borrowers, creditors and to financial and monetary system as a whole. The bill market scheme will go a long way to develop the bill market in the country.

The following are various advantages of developed bill markets:

(i) Bill finance is better than cash credit. Bills are self-liquidating and the date of repayment of a bank’s loans through discounting or rediscounting is certain.

(ii) Bills provide greater liquidity to their holders because they can be shifted to others in the market in case of need for cash.


(iii) A developed bill market is also useful to the banks is case of emergency. In the absence of such a market, the banks in need of cash have to depend either on call money market or on the Reserve Bank’s loan window.

(iv) The commercial bill rate is much higher than the treasury bill rate. Thus, the commercial banks and other financial institutions with short-term surplus funds find in bills an attractive source of both liquidity as well as profit.

(v) A development bill market is also useful for the borrowers. The bills are time-bound, can be sold in the market and carry the additional security in the form of acceptor’s signature. Therefore, for the borrowers, the cost of bill finance is lower than that of cash credit.

(vi) A developed bill market makes the monetary system of the country more elastic. Whenever the economy requires more cash, the banks can get the bills rediscounted from the Reserve Bank and thus can increase the money supply.

(vii) Development of the bill market will also make the monetary control measures, as adopted by the Reserve Bank, more effective. As pointed out by the Narasimhan Study Group, “the evolution of the bill market will also make the Bank Rate variation by the Reserve Bank a more effective weapon of monetary control as the impact of any such changes could be transmitted through this sensitive market to the rest of the banking system.”

Defects of Bill Market Scheme:


The bill market scheme is a right step in the right direction. Over the years, the functioning of the scheme has been quite encouraging. The outstanding level of bills rediscounted under the scheme increased considerably from Rs. 10 crore at the end of June 1971 to Rs. 110 crore at the end of March 1980.

But, the scheme has been subjected to criticism due to its various defects:

(i) The scheme has been generally used by the banks and their borrowers to offset the credit control measures of the Reserve bank. Whenever the Reserve Bank tried to control the bank credit without restricting the bill rediscounting facility, the banks increasingly utilised this facility. This made the Reserve Bank’s tight money policy ineffective. As a result, the Reserve Bank was forced first to put restrictions on the bill rediscounting facility, and then to allow the facility wholly on its discretion.

(ii) The bill market scheme has not been successful in developing a genuine bill market. The main reason is that the borrowers as well as the banks still have preference for cash credit and dislike for bill finance.

(iii) The scheme is restricted to banks and some selected financial institutions. It has not been able to cover the indigenous bankers and other constituents of unorganised sector of the Indian money market.

(iv) The scheme has remained mainly concentrated in the fields of industry, trade and commerce. It has not been extended to agricultural sector.