ACCEPTANCE HOUSES AND DISCOUNT HOUSES ACCEPTING HOUSES INTRODUCTION

ACCEPTANCE HOUSES AND DISCOUNT HOUSES

ACCEPTING HOUSES INTRODUCTION : An Accepting house is a primarily British institution which specializes in the acceptance and guarantee of bills of exchange thereby facilitating the lending of money. They now have taken on other function as the use of bills has declined, returning to their original wider function of merchant banking. The ‘Accepting houses’ in the City of London have representation in Westminster by the Accepting Houses Committee which ensures policy coordination between them, the treasury and the Bank of England. Members of the committee have access to discounted price of bills bought by the Bank of England, although this right has now been extended to other banks in the UK and abroad.

Definitions : v“A financial institution that guarantees a bill of exchange , as a result of which it can be discounted on more favourable terms. ” v“An institution that accepts financial instruments and agrees to honour them should the borrower default. ”

Features: v. Specialize in accepting bills of exchange v. Guarantees the bills v. Uses financial reputation to charge a fee or commission v. Uses specialized knowlegde of financial markets v. Makes the bill negotiable

Functions: v. Provide adequate liquidity in the secondary market v. Provide banking facilities in both domestic and foreign countries v. Meet both medium and short term financial requirements v. Main offices are located mainly near the central banks

Discount Houses

Meaning of Discount House �A discount house is a money lender that participates in the buying and discounting of the bills of exchange and other financial products.

FEATURES OF DISCOUNT HOUSES �These provide a ready market for treasury bills , commercial paper or other money market instruments. �They ensure adequate liquidity. �They are set up as a public company and work independently of all other financial institutions.

Functions and importance of Discount Houses �Main function is to discount the trade bills and provide liquidity in the market. �They provide a market for treasury bills , commercial bills , government guaranteed securities. (the life of these securities is about five years or less tan five years) �They borrow from banks at lower rates than the return on investment , the difference is called profit. � Discount houses help to stabilise the money market rates and prevent monetary losses.

Working of Discount Houses When the goods are sold on credit, the seller draws a bill on the buyer promising to pay a specified sum at specified date. The seller instead of waiting for the maturity date gets it discounted with the commercial bank. The bank after deducting specific discount charges makes payment to the seller. On the maturity date the bank will claim the amount from the person who accepted the bill.

Discounting Service �In 1988, RBI helped commercial banks by providing them rediscounting of their bills facility so that the banks can have abundance liquidity in times if shortages. �Through this facility RBI provided financial support to commercial banks �But setting up of DFHI has lightened the burden of RBI. �Institutions like IDBI , NABARD, EXIM bank SIDBI and NHB also play an important role in providing discounting services.

DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI)

INTRODUCTION �Incorporated on March 9, 1988 under the Companies Act, 1956. �Started its business operations w. e. f. 25 th April, 1988. �Set up jointly by RBI, public sector banks and financial institutions. �Incorporated initially with an authorised and paid up capital of Rs. 100 crore, of which 51% was held by RBI, 33% by public sector banks and 16% by other financial institutions.

FUNCTIONS OF DFHI �Stabilise the liquidity imbalances by developing primary and secondary money markets. �Acts as a depository of the surplus funds of the entire banking and non banking financial institutions. �Provides a ready market for commercial bills, treasury bills, government securities. �Acts as a specialised money market intermediary for boosting trade in money market instruments.

�It deals not only in commercial bills but also treasury bills and other money market instruments. �Facilitates money market transactions for small and medium sized institutions. �Integrates its main market at Mumbai with other markets at regional centres.

OPERATIONS OF DFHI Its activities/operations are restricted to : �Dealing in 91 days and 364 days treasury bills. �Rediscounting of short term commercial bills. �Participating in call money market and term deposit. �Government dated securities. �Dealing in commercial paper and certificates of deposit.