Loan against Supply Bills

Loan against Supply Bills

Loan against Supply Bills: The Government and Semi-government Departments or institutions make their purchases from the market by inviting tenders. The person or contractor who quotes the lowest price, gets the order for supply of the goods or completing the work. Before the goods are finally dispatched. A Government official of the concerned department examines the goods and on being satisfied gives his inspection report certifying that the goods are as per terms of the contract. The contractor or supplier then dispatches the goods by rail or any other mode of conveyance and the relevant railway receipt or any other document is sent to
Department concerned
The supplier or the contractor then prepares his bill for goods supplied or work completed. Such bill is known as supply bill. It is only a document stating the amount due by the Government. It is neither drawn in the form of a bill of exchange nor is accompanied by a bill of exchange. It is not a negotiable instrument. It simply represents a debt which can be assigned in favour of a third party. The banker grants advance to the borrower against the security of such supply bills.
Risks involved
The advancing of money against supply bills involves the following risks :
(i) The Government may refuse to pay the bill or may make deductions out of the amount due in case the terms of the contract have not been fully complied with.
(ii) Payment of bills may be delayed by Government Departments on account of procedural matters.
(iii) The Government may have a counter claim against the contractor which it can set off against the amount due to the contractor or the supplier.
Precautions to be taken
(i) The banker should be careful while selecting the customer. His past contracts with the Government should be looked into ascertain his honesty, efficiency and solvency.
(ii) The bank should get an irrevocable power of attorney executed by the customer in its favor and should get it registered with the concerned Government Department. The power of attorney will authorize the banker to receive payment of the supply bills from the Government.
(iii) An undertaking should be obtained from the customer (i.e. the borrower) that he will pay any payment received by him against the supply bills to the bank.
(iv) The banker should obtain from the customer besides the supply bill, inspection report and number of the railway receipt etc.
(v) The banker should study the terms of the contract according to which the goods have been supplied and the supply bill prepared.
(vi) The banker should keep a watch on payment of supply bills. In case of undue delay in payments of a bill it should cancel the advance sanctioned against it by debiting the account of the customer and accepting it only on collection basis.
(vii) The bank should also review periodically the outstanding bills. It should get confirmed periodically the list of such outstanding bills, from the concerned Government Department.

  1. Application for advance
  2. Accepted copy of sanction letter
  3. D. P. Note
  4. Letter of arrangement
  5. Letter of continuity
  6. Original supply order
  7. Letter of Hypothecation of the bills.
  8. Receipted chalan and inspected bills.
  9. General irrevocable power of attorney executed by the borrower and registered with the concerned Dept.
  10. Letter of undertaking issued by the concerned Dept. to pay the bill in infavour of the Bank.
  11. Letter of Guarantee from 3rd party (if any).


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