Rediscount refers to the practice of a bank purchasing a negotiable instrument at a price lower than its face value, after it has already been discounted. In some cases, the bank may further sell the discounted instrument to another bank or investor.
Rediscounting is the act of discounting a negotiable instrument that has already been discounted by a bank. It can also refer to the discounting of a negotiable instrument for a second time. For instance, if a company receives a $10,000 check from a customer and deposits it into their bank account, the bank may discount the check to give the company $9,500. Later, if the company needs more cash, they can use the discounted check as collateral for a loan. The bank may then agree to rediscount the check, providing the company with an additional $9,000. This example demonstrates how a negotiable instrument, such as a check, can undergo the process of rediscounting and be discounted twice.
Rediscounting refers to the process of a central bank buying back a bill of exchange or promissory note before its maturity date from a commercial bank at a discounted rate.
Typically, only commercial banks and financial institutions that are authorized by the central bank can avail rediscounting facilities.
Rediscounting provides liquidity to commercial banks by allowing them to convert their short-term assets into cash. It also helps in managing interest rate fluctuations and maintaining stability in the financial system.
When commercial banks rediscount their bills with the central bank, they receive cash at a discounted rate. This reduces their cost of borrowing, which can lead to lower interest rates in the market.
Yes, bills must meet certain criteria set by the central bank, such as being of a certain maturity period, being backed by genuine trade transactions, and meeting specific creditworthiness standards.
No, rediscounting facilities are typically limited to commercial banks and financial institutions authorized by the central bank.
If a bill is not repaid by the due date, the central bank may impose penalties or take legal action against the defaulting party. This can include imposing fines, restricting future access to rediscounting facilities, or even initiating legal proceedings.
No, rediscounting is generally used for short-term financing needs. It is not intended to be a long-term financing option.
Yes, there are risks involved in rediscounting, such as credit risk, interest rate risk, and liquidity risk. Commercial banks must carefully assess these risks before availing rediscounting facilities.
No, rediscounting is typically limited to bills of exchange or promissory notes that meet the eligibility criteria set by the central bank. Other types of financial instruments may not be eligible for rediscounting.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 16th April 2024.
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