Bills of exchange | Types and Classification

The bill of exchange can be classified on the basis of

  1. Place,
  2. Purpose,
  3. Documents,
  4. Parties, and;
  5. Time.

Classification of Bills of Exchange

1. On the basis of place, bills can be classified as inland bill and foreign bill. In Inland bill, parties belong to the same country. In foreign bill, parties belong to different countries. Inland bill may be a trade bill or accommodation bill, while foreign bill will be mostly a trade bill.

2. On the basis of purpose, bills can be classified as trade bill or accommodation bill. Trade bill arises out of genuine trade transaction. Accommodation bill or kite bill is meant for raising funds among the parties and it is for the purpose of discounting in the money market.

3. When bills are accompanied by trade documents, they are called documentary bill. When no document is accompanying a bill, it is a clean bill. Documentary bill is again classified as documents against acceptance bill or D/A bill and documents against payment bill or D/P bill. When the exporter sends to the importer a D/A bill, the bill will be accompanied by the following documents:

  • Bill of lading,
  • Consular invoice,
  • Certificate of origin,
  • Marine insurance policy or Air insurance policy, and;
  • Invoice.

The above documents are sent to the importer’s bank along with the bill. Soon after the importer accepts the bill, the documents are handed over to him by which he is enabled to take delivery of the goods. On the date of maturity of the bill, the importer will make payment. Sometimes, the banker will also finance the importer either through letter of credit or by hypothecating the goods and providing finance.

In the case of documents against payment bill, the above mentioned trade documents are handed over to the importer, soon after his making payment for the bill into the bank. There is no risk for the exporter or for the bank. It is done even in domestic trade also. We often come across agreement between the seller and buyer as documents are negotiated through the bank. Here, the lorry receipt or railway receipt is sent by the seller to the buyer’s bank, which delivers the receipt to the buyer after obtaining payment for the consignment.

4. Parties or payee: When a bill is payable to a specific person whose name is appearing on the bill, it is called an order bill. This bill can be transferred only by endorsement and delivery. Bearer bill, on the other hand, is payable to any person who is in possession of the bill legally on the date of maturity and to whom payment will be made by the drawee.

5. Time bill: A bill payable after a specific date or time is known as time bill and a bill payable on demand is a demand bill. Time bill is otherwise called usance bill. Example for demand bill is cheque.