Banking Issues – Accommodation bills

Generally banks discount bills raised by companies on their clients to provide much needed working capital finance to continue their operations.   In doing so, banks consider that they facilitate their corporate customers’ trade cycle, without suspecting much on the underlying transaction.

But some fraudulent companies are misusing ‘bill finance’, by drawing accommodation bills and thereby defrauding banks.    The company connives with the drawees to raise finance, which otherwise they will not be eligible for.

Such accommodation bills do not contain ‘document of title to goods’; even if it is available, it will be a fake one.   Many companies indulge in submitting ‘accepted delivery challans’ with the documents.   Normally, when a bank discounts bills and parts with funds, it is obvious that the stocks procured with the finance secure the finance.    However in such accommodation bills the finance becomes naked, as there is no movement of goods taking place.   This is the first sign of the account becoming NPA later.

Such practices by some unscrupulous clients even cross the border and reflect in export import trade.

Though bank staff is not trained to suspect everybody, they have to exercise some due diligence while extending bill finance.

-       Customer due diligence should be reviewed every year / two years

-       Credit opinion / due diligence report on the drawees by reputed agencies should be obtained periodically

-       LR / BL should be verified with the issuers at random intervals for its genuineness

-       In the case of bill finance against ‘accepted delivery challans’ surprise inspection of materials received is a must

-       It is also advisable to visit the other bank involved to discuss transactions to ensure genuineness

If the bankers tighten their vigilance, proactively, frauds and NPA can be reduced.