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Discounting / Rediscounting of Bills by banks

Presently banks purchase / discount / negotiate bills under Letter of Credit (LC) only in respect of genuine commercial and trade transactions of their borrower constituents who have been sanctioned regular credit facilities by the banks. Banks could not, therefore, extend fund-based credit facilities (including bills financing) to a non-constituent borrower or a non-constituent member of a consortium / multiple banking arrangement.

Further, the practice of drawing bills of exchange claused 'without recourse' and issuing letters of credit bearing the legend 'without recourse' is discouraged because such notations deprive the negotiating bank of the right of recourse it has against the drawer under the Negotiable Instruments Act. Banks therefore, do not open LCs and purchase / discount / negotiate bills bearing the 'without recourse' clause.

However, Reserve Bank of India (RBI) in notification to banks dated 3rd August 2007 has advised that:

(i) In cases where negotiation of bills drawn under LC is restricted to a particular bank, and the beneficiary of the LC is not a constituent of that bank, the bank concerned may negotiate such an LC, subject to the condition that the proceeds will be remitted to the regular banker of the beneficiary. However, the prohibition regarding negotiation of unrestricted LCs of non-constituents will continue to be in force.

(ii) The banks may negotiate bills drawn under LCs, on ‘with recourse’ or ‘without recourse’ basis, as per their discretion and based on their perception about the credit worthiness of the LC issuing bank. However, the restriction on purchase/discount of other bills (the bills drawn otherwise than under LC) on 'without recourse' basis will continue to be in force.


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