How banks finance against supply bills?

Payments from Government departments or Public sector Units take time for the goods supplied to them. Similarly, a party might have taken a contract for execution and he is entitled to progressive payments based on the PSU/Government departments on work executed, for which the contractor has to submit bills in accordance with the terms and conditions of the contract. The supplier of goods to the Government departments prepares his bill for goods supplied with a delivery challan. In case of work contracts, the contractor submits bill for work completed as per the terms and conditions of the agreement. Such bill prepared by the supplier/contractor is known as a supply bill. The authorized official of the buyer of the goods inspects the goods supplied and accepts the bill for payment on a due date. The supplier receives an inspection note from the authorized official of the buyer. In the case of contracts, an engineer’s certificate regarding work done is obtained by the contractor.

Bank finance against supply bills:

Banks lend against supply bills by way of purchase or discount of bills or extend cash credit facility against receivables. The charge on bill finance is created by the financing bank either by means of hypothecation or assignment of book debts. In the case of a cash credit facility, the bank allows the borrower to draw to the extent of the limit sanctioned to him provided the drawings are backed by adequate receivables.

Formalities involved in supply bills finance:

The supplier/contractor requests his banker to advance against receivables and submits the supply bills along with delivery challan, and inspection note or engineer’s certificate as the case may be. The supplier/contractor needs to assign the receivables for the goods supplied/work done in favour of the bank to avail of the working capital facility.  The lender bank further obtains a power of attorney from the supplier/contractor authorising the bank to receive the money on account of goods supplied.  In addition to the above, Bank obtains a letter from the borrower (supplier) which requests the buyer to make the payment of money receivable by him directly to the financing bank. In this regard, the supplier needs to discharge on a revenue stamp for having received the payments in lieu of assignment of receivables in favour of the bank. Before extending the facility to the borrower, the bank shall verify the inspection report/engineer’s certificate along with the accepted bills. The facility is allowed only if no adverse report/remark in the inspection note/certificate regarding the quantity and quality of goods supplied.  

There are usually two types of supply bills viz. interim bills and final bills. The major part of the total bills paid under interim bill and a small part is held by the buyer which will be later released by the buyer under final bill after complete verification of goods. Therefore, banks opt for interim bills for advancing.

Disadvantages in supply bills finance:

Supply bills do not enjoy the status of Bills of exchange. It is only a document stating the amount due by the purchaser of goods. Therefore, the bank which finances against these bills cannot enforce its claim on the purchaser (borrower’s debtors) in the event of a default. Thus, this type of advance is more or less on par with clean advance. Therefore, if a bill remains unpaid for a specific period bank would ask the borrower to arrange the funds towards the liquidation of the advance made against the specific bill.

Security:
In view of advances solely against book debts carry many risks, banks may sanction bills limit to borrowers after proper appraisal of customer’s credit needs, the creditworthiness of borrower as well as his buyers, in accordance with the loan policy of the bank. Banks may exercise their commercial judgment in purchasing /discounting of clean bills on the basis of availability of collateral as no primary security is available to this type of advance in case of default.