In banking, what is meant by bill discounting or bill discount?

Introduction / Context:
Bill discounting is a traditional banking practice used to provide short term working capital finance to businesses. When goods are sold on credit and supported by a bill of exchange, the seller may not want to wait until the maturity date to receive cash. Instead, the seller can approach a bank to discount the bill. This concept appears frequently in banking and finance examinations, so a clear definition is important.

Given Data / Assumptions:

• The bill referred to is a trade bill or bill of exchange arising from a commercial transaction.
• The bill has a face value and a future maturity date.
• The bank is willing to provide funds before maturity at a discount.
• The question focuses on the general mechanism, not on calculation of the discount.

Concept / Approach:
Bill discounting works as follows. The holder of a bill, usually the seller, presents it to a bank. The bank agrees to advance funds equal to the face value minus a discount that covers interest and charges for the period until maturity. The bank then becomes the holder of the bill and receives the full face value from the drawee at maturity. The difference between the face value and the discounted amount is the bank income. The correct option must therefore describe a bank buying the bill before maturity at less than face value and collecting the full amount later.

Step-by-Step Solution:
Step 1: Identify that the term bill in this context refers to a bill of exchange used in trade credit. Step 2: Recall that the holder wants cash earlier than the maturity date. Step 3: Recognise that the bank advances funds equal to face value minus a calculated discount, reflecting time value and risk. Step 4: Note that at maturity the bank presents the bill to the drawee and receives the full face value. Step 5: Choose the option that clearly explains this process, rather than unrelated discounts on utility bills or service charges.

Verification / Alternative check:
To verify, imagine a trader who has sold goods on credit and holds a bill of exchange for 100,000 payable in three months. The trader needs cash now to buy more stock. The bank agrees to discount the bill at, say, ten percent annual rate. For three months, the interest is roughly 2,500. The bank pays the trader 97,500 today and collects 100,000 at maturity from the drawee, earning the 2,500 difference. This process matches the definition given in the correct option and confirms that bill discounting is essentially prepayment of the bill amount minus discount.

Why Other Options Are Wrong:
Option B is wrong because offering discounts on utility bill payments is a promotional practice, not bill discounting in the banking sense. Option C is incorrect as it refers to interest rate policy rather than trade bill financing. Option D relates to waiving service charges, which has no connection with bills of exchange. Option E describes penalties for delayed payment, which is the opposite of discounting and arises in consumer credit, not in the context of trade bills.

Common Pitfalls:
Students sometimes confuse bill discounting with early payment discounts given by suppliers to buyers. While both involve reduction for early payment, bill discounting specifically involves a bank or financial institution stepping in between seller and buyer. Another pitfall is thinking that the bank pays the full face value upfront, ignoring the discount. Some learners also forget that the bill remains a legal instrument until maturity and that the bank assumes the collection risk once it has discounted the bill. Remembering these details helps answer exam questions accurately and understand how businesses finance receivables.

Final Answer:
A process in which a bank purchases a bill of exchange or trade bill before its maturity at a price less than its face value and collects the full amount at maturity.