The bill market scheme was introduced by the Reserve Bank of India in January 1952. Under this scheme, the Reserve Bank undertook to advance loans to commercial banks against their demand promissory notes supported by the security of bills of their constituents or customers.
Before 1952, the practice was that the banks could secure additional cash from the Reserve Bank only by selling government securities to it. But, now, according to the bill market scheme, a bank can grant loans to its customers against their promissory notes and can further use the same promissory notes to borrow from the Reserve Bank.
All that the bank is required is to convert these promissory notes into promissory notes maturing within 90 days.
Thus the bill market scheme aimed at widening the loan window of the Reserve Bank for the banks by allowing them to borrow even against their ordinary commercial credit after its conversion into eligible bills.
Initially, the bill market scheme was introduced on an experimental basis. It was restricted (a) to the scheduled banks with deposits of Rs. 10 crore and above: (b) for the loans with the minimum limit of Rs. 10 lakh; and (c) against the individual bills, the minimum value of each should be one lakh rupees.
Later on the scope of the scheme was broadened from time to time (a) by making more banks eligible to borrow under the scheme; (b) by reducing the minimum eligibility value for bills: (c) by reducing the minimum limit of advances; and (d) by extending the scheme to export bills with the minimum of 180 days.
Soon the bill market scheme became popular. The loans granted under the scheme increased from Rs. 29 crore in 1951-52 to Rs. 228 crore in 1955-56 and to Rs. 1354 crore in 1968-69.
The bill market scheme introduced in 1952 was in fact a pseudo bill market scheme. Its objective was not be develop a genuine bill market, but to provide extended financial accommodation to banks by the Reserve Bank.
The scheme was not based upon the genuine trade bills, but on the conversion of loans and advances of the banks into bills. The genuine bill finance imposes a discipline of making payments when due and involves the credit transactions supported with genuine trade transactions.
The bill market scheme, on the contrary, evolved the cash credit system of bank lending which the borrowers of the bank found much more convenient elastic and to their liking; the discipline of the bill finance was absent in such a system.
The Dehajia Committee report brought out the abuses of cash system and suggested the use of bill financing for the supervision of the funds lent by the commercial banks.