RBI to tighten bill discounting norms

With increasing cases of fraud coming to light, especially in the gems & jewellery and textiles sectors, the RBI is likely to tighten guidelines relating to bill discounting for banks.

The restrictions could include setting tighter limits on clients’ counterparty exposure and prescribing third-party verification of clients’ buyers.

The trigger for revisiting the bill discounting guidelines could be the ₹350-crore fraud reportedly committed by one of Bank of Baroda’s clients in Ahmedabad.

Based on references about bill discounting frauds from banks, the CBI, over the past few years, has registered cases against senior public sector bank (PSB) officials and other individuals for entering into criminal conspiracy and fraudulently discounting false and forged bills drawn on ‘buyers’ based in the country or overseas.

A senior PSB official said the bills need to be properly linked to the chain of inventory and invoices; otherwise it is a case of “accommodating” the customer.

“Mostly what happens is that the customer’s client (buyer) on whom the bills are drawn may be his own sister/related concern, but not on record. So, the customer keeps ‘supplying’ goods and getting the bills discounted. Possibly, no goods are supplied.

“That is why the banks normally do not undertake this (bill discounting) transaction unless it is a reputed client. If somebody needs to be accommodated, this is one of the ways in which the customer influences the bank to accommodate him,” explained the banker.

The official further observed that the banking system faced a similar problem a couple of years back when a large diamond exporter went on exporting to his sister concerns and relatives in Dubai and the (export) bills were discounted by banks in India.

No money came to the banks, whose exposure to this company was pegged at ₹4,000 crore.

When it comes to accounting, bill discounting is a contingent liability for the customer.

Normally what happens is that when a banker does ratio analysis, the contingent liability is not really taken as a part of the customer’s finance.

“So, this is also one way they try to fudge and present better accounts and better financials for the company.

"Sometimes a gullible bankers are taken for a ride,” said a PSB official, adding that though there are established norms for bill discounting, they are often given the go by.

Where bill discounting is done, checks and counterchecks are routinely made.

When a bank takes an exposure on a particular customer, who is supplying goods to 10-15 buyers, there is a prescription that the exposure to each buyer should not exceed a particular limit. Thus, certain risk management practices are in place.

The discounting facility should be given only to “good” customers and not just anybody, said the PSB official.

“Today, power has been delegated at the lower levels in banks. So, there are cases where they (officials) start accommodating the party…

“Once you are in the trap of the customer he exploits you. He will threaten not to pay unless discounted,” the banker said.

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