Supply Bills as a Security for the Loan/Advance :

Supply bills arise in relation to transactions with the Government and public sector undertakings. A party might have taken a contract for execution, and he is entitled to progressive payments based on work done, for which he has to submit bills in accordance with the terms and conditions of the contract. Similarly, parties who have accepted tenders for supply of goods over a period are entitled to payments on the supply of goods, for which they submit bills in accordance with the terms of the contract. These bills are known as supply bills.

Procedure followed in respect of supply bills

(i) The supplier delivers the goods supported by a delivery challan and produces the documents. The appropriate authority of the government department inspects these goods and accepts for payment on due date and the supplier obtains an inspection note. In the case of contracts, an engineer’s certificate regarding work done is obtained.

(ii) The supplier or the contractor as the case may be, prepares the bill for obtaining payment. Government departments take quite some time to verify the bills and pass them for payment. Therefore, the supplier or contractor submits these bills together with the accepted delivery challan and inspection note or the engineer’s certificates to the appropriate Government department through the banker and requests the banker to advance against such bills.

These bills do not enjoy the status of negotiable instruments. They are in the nature of debts and are assigned, in favour of the banker for payment, after affixing a revenue stamp for having received the amount. The bank should also obtain a letter from the supplier or contractor, requesting the appropriate department to make the payment directly to the banker.

Risks involved in advancing against supply bills

(i) Although the advance is self-liquidating in nature, in certain cases it can take quite some time before the advance is realized because of administrative and other Governmental procedures.

(ii) It is virtually a clean advance and the bank may not realize the full amount, because of the possibility of counter claim or the right of set off by the Government, as the charge is only by way of assignment.

(iii) Sometimes, the Government may not pass the bills for full payment because of the unsatisfactory quality of goods or defective work done by the contractor or delays in the completion of work.

Precautions to be taken by the banker

(i) Advances against supply bills should be made only to borrowers who have sufficient experience in Government business and Government regulations.

(ii) The contract between the supplier and the Government department should be scrutinized by the banker, to know the volume of transaction, period of supply, rates agreed upon and various other terms and conditions. The Government will not pass the bills unless there is faithful adherence to the terms and conditions by the supplier.

(iii) The banker should obtain a power of attorney from the supplier authorizing him to receive the money. The same should be registered with the appropriate Government department.

(iv) The banker should obtain the inspection note or the engineer’s certificates along with the bills. There should be no adverse remarks in the inspection report regarding the quality and quantity of goods supplied.

(v) There are two types of bills that are submitted by the suppliers. They are:

(a) Interim bills against which Government pays eighty to eighty five per cent of the amount.

(b) Final Bills for the balance of twenty to fifteen per cent which will be paid only after complete verification of goods at the point of destination. Because of the delay involved in the settlement of final bills, banks should prefer the interim bills for advancing and final bills only for collection. Keep sufficient margin, to cover advance with interest thereon from proceeds to be received.

(vi) Banker must reserve the right of demanding the repayment of advance, if the bills remain unpaid for a specified period. The banker, in other words, treats the bills as only items for collection and the advances are recovered.

When land/building is offered as a security, it is charged to the bank by a mortgage. Mortgages are of six kinds, though as a banker you would be dealing in only three of them. The law, relating to mortgages is dealt with in the Transfer of Property Act, 1882, and more particularly Sections 58 to 99 and 102 to 104. We shall now study these provisions and see how they affect us, as bankers in our business of lending.