PROJECT REPORT

ON

“BILL DISCOUNTING

at State Bank of Hyderabad”

PROJECT REPORT

Submitted by

M.NAVEENA
(032-08-139)

VILLA MARIE PG COLLEGE FOR WOMEN

(OSMANIA UNIVERSITY)
HYDERABAD, A.P.
2009-2010
 DECLARATION

I, M. NAVEENA declare that the project work entitled “BILL DISCOUNTING” is an

original and bonafide work done by me. The project is being submitted in partial fulfillment of
the requirement for the award of the degree of “MASTER OF BUSINESS
ADMINISTRATION” and any other university or institution has not submitted it. The contents
of this are based on the information collected by me during my tenure of the project at SBH.

Place:
Date:
(M. NAVEENA)
 ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude and I am grateful to Mr.
Srinivasulu Director, for giving me an opportunity to do this project from SBH. My special
thanks to Mr. SHIVA PRASAD (Manager - Credit, SBH) for their valuable support throughout
the project.

I would be failing in my duty if I don’t thank my ‘project guidance faculty’ for extending
valuable guidance and support.

I would like to thank Miss Shruthi (Faculty of Finance ) for assisting and guiding me to
complete the project work.

Finally, I would like to thank and give my deepest regards to my parents, and all my
friends without their support and encouragement I would not have reached this position. I am
thankful to them for molding me in such a way that I can face and succeed in any circumstances.

Place:
Date:
(M. NAVEENA)

ABSTRACT
 Discounting of B/E is a lucrative fund based service provided by the finance companies.
The act of handling over an endorsed B/E for ready money is called ‘discounting of bills’ The
margin between the ready money paid and the face value of the bill is called he discount rate and
is calculated at a rate percentage per annum on the maturity value. The maturity of a B/E is
defined as the date on which payment will fall due, Normal maturity periods are 30, 60, 90,120
days but bills maturing within 90days seem to be the most popular.

The development of bill discounting as a financial service depends up on the existence of

a full—fledged bill market. The RBI has constantly endeavored to develop a market for
commercial bills. Although a bill market scheme was launched in 1952 a real commercial bill
market grew in India after 1970. Subsequently the RBI practically withdrew from the market but
permitted banks to rediscount bills amongst themselves and with other eligible financial
institutions and finance companies.

Bill discounting emerged as a lucrative fund—based activity in India after the mid—
eighties, The finance companies acted as bill—broker between the banks and business houses.
INTRODUCTION
SBI group: State Bank of India, with its seven associate banks command the largest banking
resources in India. SBI and its associate banks are:

• State Bank of India

• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of Indore
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Saurashtra
• State Bank of Travancore

State Bank of Hyderabad was constituted as Hyderabad State Bank on 8.8.1941 under
Hyderabad State Bank Act, 1941. The Bank started with the unique distinction of being the
central bank of the erstwhile State of Hyderabad, covering present-day Telangana region of
Andhra Pradesh, Hyderabad-Karnataka of Karnataka and Marathwada of Maharashtra, to
manage its currency - Osmania Sikka and public debt apart from the functions of commercial
banking. The first branch of the Bank was opened at Gunfoundry, Hyderabad on 5th April, 1942.

In 1953, the Bank took over the assets and liabilities of the Hyderabad Mercantile Bank Ltd. In
the same year, the Bank started conducting Government and Treasury business as agent of
Reserve Bank of India. In 1956, the Bank was taken over by Reserve Bank of India as its first
subsidiary and its name was changed from Hyderabad State Bank to State Bank of Hyderabad.
The Bank became a subsidiary of the State Bank of India on the 1st October 1959 and is now the
largest Associate Bank of State Bank of India.

Objective:
• Less Discount Rate are provided by the S B H. When compare to other Banks.
• While fixing the limit for bill discounting the balance sheet and profit and loss account
are properly analyzed and various ratios are calculated to arrive at a sound business
decision.
 • Objective of Export bills were negotiated by S B H under letters of credit opened by
foreign Importers and foreign correspondent banks.
• S B H got refinance against declaration of export bills from R B I when needed.
• The lack of practice of discounting the bills with others banks having excess liquidity.

Scope:-

Scope of studying the Bill discounting in S B H to analyze and interpret in the procedure
of knowing the financial services depends upon the existence of a full-fledged bill market.

• The purpose of describing the bill discounting as a fund – based activity and asset – based
financial service.

Research Methodology

Data Collection Method:

For the purpose of the study the data collected through primary and secondary sources
have been scrutinized edited tabulated and presented through graphs as per the need.

Primary data:-
Data collected through officials and the staff of the bank.

Secondary Data:-

Data collected from annual report by Law Books published by S B H.

• Data collected from S B H library.

Limitations:-
i. The earlier sanctioned limits are fully utilized by the client
ii. The bills were promptly paid on maturity date
iii. In case of unpaid bills the drawer paid funds.
REVIEW OF LITERATURE
 Bill discounting as a fund-based activity, emerged as a profitable business in the early
nineties for finance companies and represented a diversification in their activities in tune with the
emerging financial scene in India. In the post-1992 (scam) period its importance has substantially
declined primarily due to restrictions imposed by the Reserve Bank of India.

Advantages: the advantages of bill discounting to investors and banks and finance companies
are as follows

To Investors:
1) Short term sources of finance
2) Bills discounting being in the nature of a transaction is outside the purview of section
370of the Indian Companies ACT 1956 that restricts the amount of loans that can be given
by a group companies
3) Since it is not a lending no tax at source is deducted by the making the payment charges
which is very convenient not only form cash flow point of view but also from the point of
view of the companies that do not envisage tax liabilities
4) Rates of discount are better then those available on ICDs and
5) Flexibility not only in the quantum of investments but also in the duration of investments

To Banks:

1) Safety of funds the greatest security of a banker is that a B/E is a negotiable instrument
bearing signature of two parties considered good for the amount for bill so he can enforce
his claim easily
2) Certainty of Payments: A B/E is a self liquidating asset with the banker knowing in
advance the date its maturity dies bill finance obviates the need for maintaining large,
unutilized idle cash balances as under the cash credit system. It also provides banks grater
control over there drawls.

Profitability: Since the discount on the bill is front ended the yield is much higher the in other
loans and advances where interest is paid quarterly or half yearly.
Evens out inter –Bank liquidity problems:
The development of healthy parallel bill discounting market would have stabilized the
violent fluctuations in the call money market as banks could buy and sell bills to even out there
liquidity mismatches.

Discount Rate and Effective Rate of Interest:

Banks and finance companies discounting bills prefer to discount L/C (letter of credit)-
backed bills compared to clean bills. The rate of discount applicable to clean bills is usually
higher than the rate applicable to L/C-based bills. The bills are generally discounted up-front that
is the discount is payable in advance. As a consequence the effective rate of interest is higher
than the quoted rate (discount). The discount rate rises from time to time depending upon the
short-term interest rate.

Eligibility Of Bills:
The eligibility of bills offered under the shame to the RBI is determined by the statutory
provisions embodied in section 17(2) (a) of the Reserve Bank of India Act, which authorize the
purchase sale and rediscount of bills of exchange and promissory notes, drawn on and payable in
India and arising out of bona fide commercial or trade transition, bearing two or more good
signatures, one of which should be that of scheduled bank or a state co-operative bank and
maturing:
a) In the case of bills of exchange and promissory notes arising out of any such
truncation relating to the export of goods from India with in one hundred and eighty
days.
b) In any other case, with in ninty days from the date of purchase or rediscount
exclusive of days of grace;
c) The scheme is confined into genuine trade bills arising out of genuine sale of
goods. The bills should normally have a maturity of not more than ninty days. The bill
having maturity 90to120 days is also eligible for rediscount, provided at the time
offering to the RBI for rediscount it has a usance not exsiding 90 days. The presented
 for rediscount should bear at least two signatures. The signature of a license schedule
bank is traded as a good signature;
d) The bill of exchange arising out of a sale of commodities covered by the selective
credit control directive of the RBI have been excluded from scope of the scheme
facilitate the selective credit control and to keep a watch on the level of out standing
credit against the affected commodities; and
e) The following types of bills are acceptable to RBI for the purpose of rediscount;
i. Bills drawn on and accepted by the buyer banks
ii. Bills drawn on buyer and his banker jointly and accepted by them jointly.
iii. Bills drawn on and accepted by the buyer under and irrevocable letter of
credit and certified by the buyer banks which have open the letter of credit in
the manners specified by RBI that is that the terms and condition of the letter of
credit have been duly complied with by the seller.
iv. Bills drawn on and accepted by the buyer and endorsed by the seller in
favor of his banks and bearing a legend signed by a licensed scheduled bank
which shuld endorsed the bill, conforming that the bills will be paid by bank
three days before the date of maturity.
v. Bills drawn and accepted in the prescribed manner and discounted by a
bank at the instants of the drawee.

Where the buyer banks are not a licensed scheduled bank, the bill should additionally bear
signature of a licensed scheduled bank.

Procedure for rediscounting

eligible banks are required to apply to the RBI in the prescribed form giving their
estimated requirements for the 12 months ending oct of each year and limits on sanction \
renewed for period of 1 year running from nov 1 to cot 31of the following year. The RBI
presents for payments bills of exchange rediscounted by it and such bills have to be taken
delivery of by the rediscounting banks against payment, not less than 3working days before the
dates of maturity of the bills concerned. In case bills are retired before the date’s pro-rata refund
of discount is allowed by RBI.
Processing /precaution/defaults/grey areas

Credit assessment
Banks and NBFCs (the main discounting agencies) undertake a detailed appraisal of
customer and thoroughly assess is credit worthy ness before providing the bills discounting (BD)
facility.
Regular credit limits are fixit by banks and NBFCs for individual parties for purchase and
discounting of clean bills and documentary bills separately.

This limits are renewed annually and are based on the following considerations

i. Quantum of business undertaken by the party ,that is ,turn over of inventory

ii. Credit worthiness of drawer(client)
iii. Credit worthiness of drawee and details of dishonor, if any
iv. Nature of customers industry.

Appraisal of the customer is done through several means:

1. The most important step is a careful scrutiny of the customers operations and its financial
viability for this a detailed analysis of his financial statements is carried out.
2. Since the liability of the drawee also raised in case he accepts and dishonors the bill
credit information about the drawee is also collected the drawer is asked to furnished a
list of his purchases and their banks so that a report of their credit risk can be compiled.
This is especially easy for banks as a confidential report can be easily routed through
banking channel.
3. Banks have access to frequently published Indian banks association (IBA) bulletins
which indicates the names of unsatisfactory drawers/banks and their recalled rates.
 4. Both banks and NBFCs have built up substantial credit intelligence data base which are
constantly updated based on market information. Once a client default he is black listed
and may find it difficult to discount B/E subsequently.

Special attention is paid to the following points while reviewing bills discounting limits.

iv. The earlier sanctioned limits are fully utilized by the client
v. the bills were promptly paid on maturity date
vi. In case of unpaid bills funds were paid by the drawer.

Once the party is granted a bill discounting limit, the party approaches the finance company
for each and every bill for discounting.

The following documents are submitted along with the letter of request:

a) invoice
b) challen
c) receipt of goods acknowledge by buyer
d) hundi /promissory note
e) truck receipt or railway receipt
f) post dated cheque for the into amount

While fixing the limit for bill discounting the balance sheet and profit & loss a/c are properly
analyzed and various ratios or calculated to arrive at a sound business decision.

Dealing With Default:

The cycle of liabilities in a bill discounting transaction is as follows; the drawee is liable
to the drawer; and the drawer to the discounting agency. However the bank/NBFCs looks mainly
to its customer (drawer or drawee) for recovery of its dues, In case of default, the discounting
agency can resort to nothing and protesting as laid down by the Negotiable Instrument Act.
Grey Areas:
There are certain features of the Indian industry which have impeded the growth of a healthy
discounting market (BD).

Participants:
Most of the customers approaching banks/NBFCs for bills discounting are SSI (Small scale
industries) units. For such enterprises, it is very difficult to undertaken proper credit assessment.

Kite Flying:
The practice of discounting accommodation bills is know as kite flying, When A draws a B/E
on B with out there being any underlying movement of goods and B accepts it to accommodate
A, the B/E is called an accommodation/Kite bill. If A now discounts it, he has uninterrupted use
of funds for the maturity period of the bill. These funds are generally routed into the capital
market to earn a very high return on the due date the amount of the B/E is repaid by A. This
practice has severely stilted the genuine bill market, by imparting false liquidity to the system.

Supply Bills;
B/E drawn by supplier/contractors on Government departments is called supply bills. These
are not accepted by the Government. However contractors are able to get them discounted with
nationalized banks, If there is a default on the due date, banks simply debit the dues to the
‘Government/c ‘. This practice depresses the level of cash flow in the bill market because a B/E
is being discounted without a corresponding flow of cash.

Reduced Supply:
Several corporate houses and business groups do not accept B/E Drawn on them. Accepting
such bills is seen to be damaging to their pride, such attitudes reduce the supply of bills and
discourage the culture of drawing and discounting bills.

Stamp Duties:
 No stamps duties are levied on LC (letter of credit) backed bills upto 90 days. This has
resulted in a lop sided growth in the bills markets with practically no bills being drqna for a
period exceeding 90 days, The market, lacks depth.

PRESENT POSITION OF BILLS DISCOUNTING:

Financial services companies had been acting till the early nineties as bill-brokers for sellers
and buyers of bills arising out of business transactions. They were acting as link between banks
and business firms. At times they used to take ip bills on their own account, using own funds or
taking short-term accommodation from banks working as acceptance/discount houses. They had
been handling business approximating Rs. 5,000 crores annually, Bill discounting as a fund-
based service, made available funds at rates 1 per cent lower than on ash credit finance
constituted about one-forth of bank finance.

However the bill re-discounting facility was misused by banks as well as the bill-broker. The
Jankiraman Committee appointed by the RBI which examined the factory responsible for the
securities-scam identified the following misuse of the scheme:

Banks have been providing bill fiancé outside the consortium without informing the consortium
bankers.
• They have been drawing bills on companies and they themselves discounted such bills to
avail of rediscount facilities;
• In case where banks provided additional finance outside the consortium arrangement by
way of bill limits covering sales of goods, the sales proceeds have been unavailable to
them to provide production finance,
• Bill finance had been provided to dealedrs/stockists of large manufacturing companies
without proper appraisal of their credit needs;
• Bills discounted by front companies set up by industrial groups on their parent companies
which were obviously accommodation bills were discounted /rediscounted by banks;
 • They rediscounting of bills by finance companies with banks was done at a much lower
rate of interest;
• Although bills are essentially trade documents, bills related to electricity charges, custom
charges lease rentals etc, were also discounted. This was mainly due to the lack of depth
in the bills market and NBFCs felt the need for new instrument or schemes to increase
their business.
• No records regarding bill discounting facility by banks the RBI issued guidelines to
banks in July 1992.

The main elements of these guidelines are as follows:

• No fund/non fund based facility should be provided by banks outside the
consortium arrangement;
• Bill finance shuld be a part of the working capital/credit limit;
• Only bills covering purchase of raw materials/inventory for production purposes
and sale of goods should be discounted by banks;
i. Accommodation bill should never be discounted;
ii. Bill re-discounting should be restricted to usance bills held by other banks.
The banks should not re-discount bills earlier discounted by finance
companies;
As a result there was substantial decline in the volume of bill discounting. Presently the volumes
are on an average Rs. 800 – 900 crores per year.

BILLS REDISCOUNTING SCHEME

Under this scheme of IDBI the prospective purchaser-user of indigenous machinery

approaches the eligible manufacturer-seller and suggests to him that instead of cash down
payment in full for the required machinery he would prefer to acquire it on deferred payments
terms under the Bills Rediscounting Scheme of the IDBI. If the suggestion is accepted by the
manufacturer-seller the cost of machinery excluding the advance payment is sub-divided into
half –yearly or yearly installments and separate bills or promissory notes drawn/made for each
installment plus interest in respect of deferred payments. On delivery to the manufacturer-seller
who gets them discounted with his own banker hereby realizing the cost of the machinery. The
discount payable by him to his banker is included in the amount of the bills by way of interest for
the period of deferred payment. The banker of the manufacturer seller in turn takes the
discounted bills to the SBH and gets them rediscounted thus obtaining the amount paid by him to
the manufacturer-seller. Subsequently the discounting bank takes back the bills from SBH
against payment three working days in advance of their due dates and obtains the payment
thereof on due dates from the purchaser/guarantor of the bills.

Procedure for rediscounting:

Eligible banks are required to apply to the RBI in the prescribed form giving their
estimated requirements for the 12 months ending October of each and limits are
sanctioned/renewed for a period of one year running from November 1 to October 31 of the
following year. The RBI presents for payment bills of exchange rediscounted by it and such bills
have to be taken delivery of by the rediscounting banks against payment not less than three
working days before the dates of maturity of the bills concerned. In case bills are retired before
the date, pro-rata refund of discount allowed by the RBI.

Eligibility Criteria for Manufacturer-Sellers

Deferred payment facilities are available to the following:
Manufactures of indigenous capital equipment/machinery of any type including
agricultural equipment and machinery:
Or
Authorized selling agents/distributors of manufacturers (foreign or local) provided they
have paid the full consideration to the machinery manufacturer before the execution of the
relative set of bills or promissory notes:

Eligibility Criteria for Buyers:-

Capital equipment/machinery can be purchased on differed payment basis by the following:
 • Purchaser-user belonging to the private sector;
• Autonomous enterprises under the state or central governments, e.g. electricity boards,
road transport corporations or manufacturing units;
• Farming enterprises not doing farming themselves but providing mechanized services to
small farmers;
• Agriculturists buying agricultural machinery/equipment;
• Selling agents/distributors/dealers of agricultural machinery and equipment provided
similar deferred payments facilities are offered by them in turn to the purchasing farmers.

Facilities under this scheme can hence be availed by both the private and the public sector. The
actual users may belong to industrial sector as also to non-industrial sector provided that the
equipment is not applied for trading, domestic and leasing purposes. The non-industrial
commercial users can avail of these deferred payment facilities provided the equipment is
procured directly from manufactures and not through selling agents/distributors.

Documentation for Bills of Exchange

The bills of exchange to be offered for rediscounting may be drawn either by the
purchaser on his banker vide pro forma on Annexure 11.1 by the seller on the
purchaser/purchaser’s banker vide pro forma on Annexure 11.2. The bills covering sales by
authorized selling agents/distributors of machinery manufacturers are some what different and
are covered by pro forma given on Annexure 11.3

A separate bill has to be drawn for every installments payable under the differed payment
arrangement. The bills eligible for rediscounting must have an unexpired Usance of not less than
6 months on the date of their lodgment with SBH. The first installment should not fall due later
than a year from the date of dispatch of machinery or date of execution of bills, which is earlier.

The bills, to be eligible for rediscounting, should be accepted for payment at two alternate
places, viz the office of the SBH where the bills are proposed to be rediscounted and the
corresponding office at the same location of the approved bank tendering bills for rediscounting.
Documentation for Deferred Credits:
The ICICI insists on either acceptance/co-acceptance of usance bills or a guarantee by
commercial banks towards security gains deferred payments.
In respect of acceptance/co-acceptance of usance bills by commercial banks, the bill must
be on the prescribed format (Annexure 12.2 or 12.3). In all cases, a certificate must also be
obtained from the commercial bank on the prescribed format (Anenexure12.4) on its letter head
certifying that the person(s) signing on behalf of the bank on the usance bills has/have the
requisite authority to do so and their signature have been duly attested.
In respect of usance bills guaranteed by commercial banks, the bill must be on the
prescribed format (Annexure 12.5)
The under mentioned guidelines of the ICICI must also be kept in mind while executing the
usance bills and obtaining the bank guarantees:

 The interest should be rounded off to the nearest rupee.

 The bills should be payable at intervals of exactly six months.
 The guarantee must be dated on or after the date of execution of the usance bills.

According to the Indian Negotiable Instruments Act, 1881.

“The bill of exchange is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person sum of money only to, or to the order of, a certain person,
or to the bearer of that instrument.”

The bill of exchange (B/E) is used for financing a transaction in goods which means that it is
essentially a trade-related instrument.

TYPES OF BILLS:

There are various types of bills. They can be classified on the basis of when they are due
for payment, whether the documents of title of goods accompany such bills or not, the type of
activity they finance, etc. Some of these bills are:
Demand Bills:
This is payable immediately “at sight” or “on presentment” to the drawee. A bill on
which no time of payment or “due date” is specified is also termed as a demand bill.

Usance Bill:
This is also called time bill. The term usance refers to the time period recognized by
custom or usage for payment of bills.

Documentary Bills:
These are the B/Es that are accompanied by documents that confirm that a trade has taken
place between the buyer and the seller of goods. These documents include he invoices and other
documents of title such as railway receipts and bills of lading issued by custom officials.
Documentary bills can be further classified as:

i. Documents against acceptance (D/A) bills and

ii. Documents against payments (D/P) bills.

D/A Bills:
In this case, the documentary evidence accompanying the bill of exchange is deliverable
against acceptance by the drawee. This means the documentary bill becomes a clean bill after
delivery of the documents.

D/P Bills:
In case a bill is a “documents against payment” bill and has been accepted by the drawee,
the documents of title are held by the bank or the finance company till the maturity of the B/E.

Clean Bills:
 These bills are not accompanied by any documents that show that a trade has taken place
between the buyer and the seller. Because of this the interest rate charged on such bills is higher
than the rate charged on documentary bills.

PURCHASE OF CLEAN BILLS

Foreign clean bills generally include personal checks drawn in foreign currencies, foreign
traveler checks dividend warrants on companies abroad etc. they are purchased by banks and
sent to foreign correspondent banks or overseas branches for realization. All this instruments
should be brought by banks only after satisfying them self’s about their genuineness and also the
credit standing of the drawer of this instruments (bills).

1) Procedure for purchase of clean bills

a) The customer must submit an application in a prescribed form of the bank (for
discounting the bill) along with the bill.
b) The application and the bill should be scrutinized carefully to ensure there
genuine ness and correctness .if they are found in order the approval of the appropriate
officer must be obtained for discounting the bill.

2) Preparation of vouchers :

After obtaining the approval of the officer concerned the following vouchers should be
passed.
Debit:
Central office A/c or Foreign Exchange Department (correspondent or branch abroad shadow
A/c) for the ill amount.

Credit:
Customer for the bill amount less charges.

Credit:
Profit and Loss A/c – Foreign Commission for the commission charges.

3) Recording in the register :

Record the details of the bill in the Register of Remittances Lodged (Outward) as follows

Date ……………………………………...
Ref.No…………………………………….
Particulars of bills etc……………………..

The details recorded are as under

1 2 3 4 5 6
Date Ref.No. Particulars Drawers Drawers Foreign currency
Of bill name and bank name amount
Address Address

7 8 9 10 11 12
Rate of Re.eqilnt COM. and To whom Initials Date of Exchange
charges sent for reversal
Realization
 13 14 15 16 17
Credit ref.No Amount of bills Commission Amount Initial
Collected reimbursed

4. Preparation of Collection Advice:

Complete the Foreign Bills (Clean) Collection Advice in duplicate.

(a) The instruction for accounting/remitting the proceeds is given in this collection
advice. The orginal copy is sent to the foreign bank/branch along with the
instrument, and the duplicate is retained for office record.
(b) Some foreign banks provide printed copies of collection advice in a carbon set.
Whenever this is not available banks own form is used. Except for the last copy
which is retained by the sending bank for record, all other copies are sent to the
collection bank along with the instrument. Two copies of the advice are later
returned to the bank sending the instrument giving details of credit.

5. Markings to the Affixed on the Bill:

(a) the rank’s crossing stamp

(b) the Rank’s ‘round’ stamp with the Reference Number and
(c) the Rubber stamp certifying payment:

6. After attaching the bill to the original covering schedule, the bill, vouchers, register, etc., are
sent to the office for checking and signature.
 If the cheques/drafts are payable at a place. Where the banks offer services of giving
immediate conditional credit banks in India should forward those cheques/drafts to foreign
correspondent for conditional immediate credit.

7. Debit vouchers should be prepared and sent to the cash department with remark’s “Pay
cash”/credit the proceeds of the Bill to the customer’s account.

8. All the copies should be fixed in serial order.

9. Purchase note is prepared and sent to the dealing section, informing the purchase of the
foreign currency.

10. Procedure on Realization of Bill:

(a) If any charges have been deducted by the collecting foreign

correspondent, calculate its rupee equivalent; recover the same amount from the
customer. The rate applicable for this purpose is the BC Selling rate.
(b) The following vouchers are prepared (for adjustment of charges)

Debit: Customers for the amount of correspondent’s charges

Credit: Central Office or Foreign Exchange Department (Foreign Correspondent –
Shadow A/C for the amount of adjustments.

(C) The etails of payments and the adjustment effected are recorded in the appropriate
Colums against the orginal entry in the Register of Remittance
Lodged (Outward) and the entry is rounded off to indicate its closing.
(d) The certifacte of Foreign Inward Remittance form, if requested by the customer,
is prepared. A remark to this effect is also made in the Register.
(e) The credit advice, vouchers (if any) and the Register are sent to the officer for
checking and signature.
(f) Office copies should be filed in serial order.
11. Procedures for collection of Foreign (Clean) Bills:

1. On receipt of the bills, it shuld be verified whether they are payable abroad.
2. If there is a request for cash payment on realization, it shuld be ensured that the
bill is being collected for a customer of the bank.
3. The details of the shuld be entered in the the Register of Remittance Lodged
(Outward) and obtain serial reference number.

The details recorded are as under

1 2 3 4 5 6
Date Ref.No. Particulars Drawers Drawers Foreign currency
Of bill name and bank name amount
Address Address

7 8 9 10 11 12
Rate of Re.eqilnt COM. and to whom Initials Date of Exchange
charges sent for reversal
Realization

13 14 15 16 17
Credit ref.No Amount of bills Commission Amount Initial
Collected reimbursed

Creation of a B/E:
 Suppose a seller sells goods or merchandise to a buyer. In most cases the seller would
like to be paid immediately but the buyer would like to pay only after some time that is the buyer
would wish to purchase on credit, to solve this problem the seller draws a B/E of a given
maturity on the buyer. The seller has now assumed the role of a creditor and is called the drawer
of the bill. The buyer who is the debtor is called the drawee. The seller the sends the bill to the
buyer who acknowledges his responsibility for the payment of the amount on the terms
mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer
himself or any third party willing to take on the credit risk of the buyer.

Discounting of B/E:
The seller who is the holder of an accepted B/E has two options:

1) Hold on to the B/E till maturity and then the payment from the buyer.
2) Discount the B/E with discounting agency .Option (2) is by for more attractive to the
seller.
The seller can take over the accepted B/e to a discounting agency (bank, NBFC,
company, high net worth individual) and obtained ready cash .the act of handing over an
endorsed B/E for ready money is called discounting the B/E .the margin between the ready
money paid on the pace valve of the bill is called the discount and is calculated at a rate
percentage per annum on the maturity value.

The maturity a B/E is defined as a date on which payment will fall due. Normal maturity periods
or 30, 60, 90 or 120 days but bills maturing with in 90days seem to be the most popular.
COMPANY PROFILE
INTRODUCTION OF BANK
BANKING SYSTEM IN INDIA
Structure of the organised banking sector in India. Number of banks are in
brackets.
Banking in India:

Originated in the first decade of 18th century with The General Bank of India coming
into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now
defunct. The oldest bank in existence in India is the State Bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was
the most active trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were
founded under private ownership. The Reserve Bank of India formally took on the responsibility
of regulating the Indian banking sector from 1935. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers.

Contents

 Nationalisation
 Liberalisation

Nationalisation

The next significant milestone in Indian Banking occurred on July 19, 1969 when the
then Indira Gandhi government nationalized the 14 largest commercial banks. A second
nationalization of 6 more commercial banks followed in 1980. The stated reason for the
nationalisation was to give the government more control of credit delivery. After this, until the
1990s, the nationalised banks grew at a leisurely pace of around 4%, closer to the average growth
rate of the Indian economy.
Liberalisation

In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be known as
New Generation tech-savvy banks, which included banks such as UTI Bank (the first of such
new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the
rapid growth in the economy of India, kickstarted the banking sector in India, which has seen
rapid growth with strong contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.

Current scenario

o Public Sector Banks

o Private Sector Banks
o Foreign Banks

Public Sector Banks

The Bank of Bengal, which later became the State Bank of India.

SBH group : State Bank of India, with its seven associate banks command the largest banking
resources in India. SBH and its associate banks are:
 • State Bank of India
• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of Indore
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Saurashtra
• State Bank of Travancore

After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19
nationalised banks in India:

• Allahabad Bank
• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab & Sind Bank
• Punjab National Bank
• Syndicate Bank
• Union Bank of India
• United Bank of India
• UCO Bank
• Vijaya Bank
Private Sector Banks

• Bank of Rajasthan
• Bharat Overseas Bank
• Catholic Syrian Bank
• Centurion Bank of Punjab
• Dhanalakshmi Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IndusInd Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Kotak Mahindra Bank
• SBH Commercial and International Bank
• South Indian Bank
• Tamilnad Mercantile Bank Ltd.
• UTI Bank
• YES Bank

Foreign Banks

• ABN AMRO BANK N.V.

• Abu Dhabi Commercial Bank Ltd
• Bank of Ceylon
• BNP Paribas Bank
• Citi Bank
• China Trust Commercial Bank
• Deutsche Bank
 • HSBC
• JPMorgan Chase Bank
• Standard Chartered Bank
• Scotia Bank
• Taib Bank

Currently (2007), overall, banking in India is considered as fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets-as compared to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility-without any stated exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially
in its services sector, the demand for banking services-especially retail banking, mortgages and
investment services are expected to be strong. M&As, takeovers, asset sales and much more
action (as it is unravelling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005
that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They
have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by
ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

About State Bank of Hyderabad / Overview

Our Mission
“To achieve pre-eminence in banking and financial sectors with commitment to
excellence in customer satisfaction, profit maximisation and continued emphasis on
developmental banking through a skilled and committed work force by providing training
facilities and technological upgradation"

Overview

State Bank of Hyderabad was constituted as Hyderabad State Bank on 8.8.1941 under
Hyderabad State Bank Act, 1941. The Bank started with the unique distinction of being the
central bank of the erstwhile State of Hyderabad, covering present-day Telangana region of
Andhra Pradesh, Hyderabad-Karnataka of Karnataka and Marathwada of Maharashtra, to
manage its currency - Osmania Sikka and public debt apart from the functions of commercial
banking. The first branch of the Bank was opened at Gunfoundry, Hyderabad on 5th April, 1942.

In 1953, the Bank took over the assets and liabilities of the Hyderabad Mercantile Bank Ltd. In
the same year, the Bank started conducting Government and Treasury business as agent of
Reserve Bank of India. In 1956, the Bank was taken over by Reserve Bank of India as its first
subsidiary and its name was changed from Hyderabad State Bank to State Bank of Hyderabad.

The Bank became a subsidiary of the State Bank of India on the 1st October 1959 and is now the
largest Associate Bank of State Bank of India.

State Bank of Hyderabad is an associate bank of State Bank of India and one of the scheduled
banks in India. It was originally a bank started by the Nizam of Hyderabad. After India's
Independence these and other banks of the princely states were renamed after the Subsidiary
Banks Act was passed in 1959 and turning them into subsidiaries of SBH. SBH was the first
subsidiary of State Bank of India. It's Headquarters is in Hyderabad, India.

About State Bank of Hyderabad / Board of Directors

Shri O. P. Bhatt
Chairman
Ex-officio under Section 25(1)(a) of the
State Bank of India (Subsidiary Banks) Act,19

Shri Amitabha Guha

Managing Director

Shri Y. Vijayanand
Director
Nominated by the State Bank of India

Smt. Madhavi Sharma

Director
Nominated by the Reserve Bank of India

Shri Jiban Goswami

Director
Nominated by the State Bank of India

Shri S. A. Thimmaiah
Director
Nominated by the State Bank of India

Shri P Laxminarayan Rau

Director
Nominated by the State Bank of India

Shri S P S Sangwan
Director
Nominated by the Govt. of India
Shri I. Ram Reddy
Director
Nominated by the Govt. of India

Shri M Harshavardhan
Director
Nominated by the Govt. of India

Banking Overview

The major participants of the Indian financial system are the commercial banks,
the financial institutions (FIs), encompassing term-lending institutions, investment
institutions, specialized financial institutions and the state-level development banks, Non-
Bank Financial Companies (NBFCs) and other market intermediaries such as the stock
brokers and money-lenders. The commercial banks and certain variants of NBFCs are
among the oldest of the market participants. The FIs, on the other hand, are relatively new
entities in the financial market place.
 DATA ANALYSIS AND
INTERPRETATIONS

Cost of finance:-

The existing of rediscount and discount are as under:

 %age per annum)
Unexpired Usance of bills of exchange/
Promissory notes
-------------------------------------------------

6 to 36 months over 36 months

-------------------------------------------------
S. Redis- Discount Redis- discount
No. Particulars count count

1. Normal rates 11.00 12.00 10.50 11.50

2. Rates for small-scale 9.75 11.00 9.25 10.50
Sector (seller and/or
Purchaser)

3. Rate for State Electricity 8.25 9.00 7.75 8.50

Boards and State Road
Transport Corporations
In the North-Eastern and
Himalayan and Hill region*
4. Rates for State Electricity 10.25 11.00 9.75 10.50
Boards and State Transport
Corporations at locations
Than covered in 3 above
5. Rates for renewable energy 8.25 9.50 7.75 9.00
Equipment (seller and/or Purchaser)

*Comprises states of Assam, Himachal Pradesh, Jammu & Kashmir, Manipur, Meghalaya,
Nagaland, Sikkim, Tripura and the Union Territories of Arunchal Pradesh and Mizoram. These
rates also apply to Uttar Pradesh SRTC/SEB in respect only of purchase of chassis/machinery for
operation in the districts of Alora, Chamoli, Dehrudun, Nainital, Pithoragarh, Pauri Garhwal,
Tehri Garhwal, Uttar kashi and West Bengal SRTC/SEB in respect of purchases of
chassis/machinery for operation in the hill district of Darjeeling

The manufacturer/seller cannot charge the purchaser-user by way of interest for the
deferred payment period an amount which is higher than the amount paid by the manufacturer-
seller to his banker by way of discount. If on discounting of the bills, any excess amount is found
to have been charged, the same is to be refunded to the purchaser through the discounting bank.

The SBH reserves the right to refuse to rediscount the bills of such manufacturer-sellers who do
not comply with this requirement.
The Usance bills/promissory notes are subject to stamp duty. The present rates of stamp
duty in respect of bills and promissory notes executed under the scheme are as follows:

Usance of bill/
Promissory note stamp duty
Up to 9 months Rs.1.50 for every Rs. 1,000 or part thereof
Beyond 9 months Rs. 2.00 for every Rs. 1,000 or part thereof
And up to 12 months
Beyond 12 months Rs. 4.00 for every Rs. 1,000 or part thereof

Conversion of Discount Rates

The rates of discount applicable for discounting and rediscounting have already been
covered in the earlier paragraphs. It is a lengthy exercise converting the discount rates into
corresponding interest rates for working out the face value of the bills. The commonly used
method of conversion is explained below.

Suppose a machinery valued at Rs. 10,000 (excluding advance payment) is sold on a five
year deferred payment basis and ten bills of equal principal amount are proposed to be drawn for
9, 12, 18, 24, 30, 36, 42, 48, 54, and 60 months Usance. The relevant normal rates of discount for
the bills are 12.0 per cent per annum for bills having Usance upto 36 months and for those over
36 months but up to 60 months respectively. The corresponding rate of interest needs to be
computed in order to calculate the face value of each bill.

Let us presume that the average rate of interest for the above rates of discount is ‘Y’ per
cent per annum and each installments of principal is of Rs. 1,000.

The details calculation of interest relating to each bills is as under:

Interest Amount of Discount

1. 10000X9/12Xy/100 = 75.0y (1000+75.0y)X9/12X12.00/100 =90.0+6.75y

2. 9000X3/12Xy/100 = 22.5y (1000+22.5y)X12/12X12.00/100 =120.0+2.70y

3. 8000X6/12Xy/100 = 40.0y (1000+40.0y)X18/12X12.00/100 =180.0+7.20y

4. 7000X6/12Xy/100 = 35.0y (1000+35.0y)X24/12X12.00/100 =240.0+8.40y

5. 6000X6/12Xy/100 = 30.0y (1000+30.0y)X30/12X12.00/100 =300.0+9.00y

6. 5000X6/12Xy/100 = 25.0y (1000+25.0y)X36/12X12.00/100 =360.0+9.00y

7. 4000X6/12Xy/100 = 20.0y (1000+20.0y)X42/12X11.50/100 =402.5+8.05y

8. 3000X6/12Xy/100 = 15.0y (1000+15.0y)X48/12X11.50/100 =460.0 +6.90y

9. 2000X6/12Xy/100 = 10.0y (1000+10.0y)X54/12X11.50/100 =517..5 +5.17y

10.1000X6/12Xy/100 = 5.0y (1000+5.0y)X60/12X11.50/100 =575.0+2.88y

Under Rediscounting Scheme:

Value of Usance Bills:
Assuming a five year deferred payments spread and a principal amount of Rs. 100 (net of
advance payment), the usance bills would be for the following values:

Base for
Interest Amount of
Usance Period Calculation Principal Interest Usance Bill
Bill No (Month) (Rs.) (a) (b) (a+b)

1. 6 100 --- 7.50 7..50

 2. 12 100 20 7.50 27.50
3. 18 80 10 6.00 16.00
4. 24 70 10 5.25 15.25
5. 30 60 10 4.50 14.50
6. 36 50 10 3.75 13.75
7. 42 40 10 3.00 13.00
8. 48 30 10 2.25 12.25
9. 54 20 10 1.50 11.50
10. 60 10 10 0.75 10.75
-------- -------- -----------
Total 100 42.00 142.00
--------- -------- -----------