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Question
Answer the following question.
Explain discounting bills of exchange as one of the functions of the banks.
Solution
Discounting of Bills of Exchange:
Another important form of bank lending is through discounting or purchasing the bills of exchange. A bill of exchange is drawn by a creditor on the debtor specifying the amount of debt and also the date when it becomes payable. Such bills of exchange are normally issued for a period of 90 days. Thus, creditors cannot get it encashed from the debtors before the maturity period. However, if the creditor needs money before the maturity period (i.e., 90 days), he can get it discounted from the commercial bank. The bank makes payment to the creditor after deducting its commission. When the bill matures, the bank will get payment from the debtors.
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