Rediscount

Posted in Finance, Accounting and Economics Terms, Total Reads: 448
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Definition: Rediscount

A rediscount is a second discount on a short-term negotiable debt instrument. Usually central banks rediscount an instrument that has already been discounted once by commercial banks. This is done so as to improve liquidity in the market.

Description:

Usually banks buy bills/promissory notes/other debt instruments of companies before they are due and pay the bill amount post a discount charge to the customer. So if the customer comes to the bank with a bill of Rs. ‘X’, he/she is given the amount but is asked to pay back Rs. ‘X+Y’, with the ‘Y’ component being charged as an interest on the advance loaned to the customer. The bank is thus “discounting” by paying only ‘X’ instead of the face value of ’X+Y’.

In cases where commercial banks themselves run out of liquidity, they approach central banks for rediscounting their debt instruments. This helps to maintain liquidity in the banking sector. There are regulations around this area that restrict commercial banks from approaching central banks for rediscounting certain types of instruments or for excessive rediscounting requests.

 

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