Invoice Discounting Regulations

Minimal risk and attractive returns make invoice discounting an ideal option for a company in the short term to diversify its portfolio. This article focuses on India’s rules and regulations governing invoice discounting practices.

Is invoice discounting regulated in India?

The Reserve Bank of India (RBI) formed a working group on Discounting of Bills by banks in 1999 to examine the possibility of widening the scope of bill discounting and extending the facility even to the services sector, given its traction and growth.

Who regulates invoice discounting in India?

Apart from a few private players, the Reserve Bank has allowed Receivables Exchange of India, Trade Receivables Discounting System (TReDS) and M1Xchange to operate the online bill discounting platforms under its TReDS initiative. Combined, these platforms have discounted bills amounting to Rs.18,000 crore in the last fiscal year.

Who can discount invoices in India?

The option to avail of the benefits of invoice discounting is open to all businesses selling goods or services to customers, with the credit period ranging between 30 and 90 days. The following are the key players in invoice discounting:

• Manufacturers
• Distributors
• Business to Business Services

Where can one carry out invoice discounting in India?

With the eruption of Fintech companies, trading invoices has become as easy as raising a loan. A few e-discounting platforms offer invoice discounting services in India that businesses can opt for to liquidate their invoices or invest in them for good returns with minimal risk.

The RBI regulates all these platforms under the Payments and Settlement System (PSS) Act 2007. A supplier uploads its invoices onto the invoice discounting platform, which interested financiers then evaluate. The funds are transferred to the supplier as per the agreement.

Summary of report of the working group on Discounting of Bills by banks

Since the inception of the New Bill market scheme, the Reserve Bank has introduced several measures for encouraging and widening the use of bills of exchange. Some of the measures include:

• Simplifying the rediscounting procedures by doing away with the actual lodgement of bills in respect of bills less than the face value of Rs.10 lakh and replacing the same with derivative bills. The restriction on the minimum bill amount at Rs.5,000 under the scheme has also been dispensed.
• Remission of the stamp duty by the Indian Government on bills of exchange drawn in favour of a co-operative bank or a commercial bank and payable within three months from the date of acceptance.
• Allowing the licensed scheduled commercial banks for rediscounting bills with a few financial institutions such as General Insurance Corporation of India (GIC), Life Insurance Corporation of India (LIC) and their subsidiaries, and Unit Trust of India (UTI) and other financial institutions that are incorporated in India, and as may be approved by the RBI.
• Increasing the participants in the bill rediscounting market to include mutual funds and all-India financial institutions, thus supplementing the supply of funds in the secondary market.
• Enabling multiple rediscounting of bills of exchange by revising the procedure.
• Delinking interest rates applicable on bills discounting from the prime bank lending rates, thus offering the financers the freedom to charge an interest rate on bills determined by the market.