Question

Question #10 A business customer needs a three-year debt facility to restructure some of his debt. As the commercial lending manager NAB, explain to the customer why using bank accepted bills will be appropriate, even though bank bills have a maximum maturity of 180 days.

Answer 1

Here the first thing that we need to understand is the relevant of bank bills in money market operations.

1. Bank bills are a kind of IOU ( I Owe You) similar to another cheque or we may say a kind of bills of exchange.

2. They have specific date in the future when they are payable, hence they involve a greater degree of certainty as far as the honoring of payment is concern

3. from a bank's prospective they are short term money market instruments, enables the banks in maintaining a better asset liability management due to high predictability of cash flows ( by way of timely payments).

Here the customer is looking for restructuring some of its debt with another three years debt facility. In the light of above mentioned features of bank bills as a Commercial lending manager of NAB, i would explain the following points to my customer.

1. Since the customer is looking for debt restructuring they need a fixed commitments  to meet out the future repayments.Here considering the nature of Bank bills ( as pointed out in point 2 above) the customer may have and may also convince to other lenders a greater degree of certainty of payments.
2. The customer can pay off its due or may be over due commitments by using the bank bills which helps him/ her to save its credit rating.
3. Since the maximum time for bank bills are of 180 days the customer may use the bank bills accordingly, to meet out the future agreed repayments may be half yearly, quaterly.
4. The customer may better concentrate on its business by assuring the repayments (from bank bills) of near future of existing debt.
5. The risk of interest rate fluctuations are also minimised by switching some of the debt to bank bills.

As a conclusion, considering the inherent nature of bank bills (i.e short term money market instruments) the same may be used for meeting out short term obligations and keeping safe the credit profile and better concentration on business.