The call money market is an integral part of the indian money market
The call money market is an integral part of the Indian Money Market, where the day-to-daysurplus funds (mostly of banks) are traded. The loans are of short-term duration varyingfrom 1 to 14 days. The money that is lent for one day in thismarket is known as "Call Money", and if it exceeds one day (but less than 15 days) it isreferred to as "Notice Money". Term Money refers to Money lent for 15 days or more in theInter Bank Market.Banks borrow in this money market for the following purpose:• To fill the gaps or temporary mismatches in funds• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank• To meet sudden demand for funds arising out of large outflows.Thus call money usually serves the role of equilibrating the short-term liquidity position ofbanksCall Money Market Participants :1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI andmutual funds etc.Reserve Bank of India has framed a time schedule to phase out the second category out ofCall Money Market and make Call Money market as exclusive market for Bank/s & PD/s.The most active segment of the money market has been the call money market, where theday to day imbalances in the funds position of scheduled commercial banks are eased out.The call notice money market has graduated into a broad and vibrant institution .Call/Notice money is the money borrowed or lent on demand for a very short period. Whenmoney is borrowed or lent for a day, it is known as Call (Overnight) Money. Interveningholidays and/or Sunday are excluded for this purpose. Thus money,borrowed on a day and repaid on the next working day, (irrespective of the number ofintervening holidays) is "Call Money".When money is borrowed or lent for more than a day and up to 14 days, it is "NoticeMoney". No collateral security is required to cover these transactions.
Discount and Finance House of India (DFHI)The Working Group of Money Market, in its Report submitted in 1987, recommended, amongother things, that a Finance House should be set up to deal in short-term money marketinstruments.As a follow-up on the recommendations of the Working Group, the Reserve Bank in India, incollaboration with the public sector banks and financial institutions, set up the Discount andFinance House of India Limited (DFHI) in.April 1988. DFHI is the apex body in the Indian money market and its establishment is a majorstep towards developing a secondary market for money instruments. DFHI, which commencedits operations from April 25, 1988, deals in short-term money market instruments.As a matter of policy, the aim of the DFHI is to increase the volume of turnover rather than tobecome the repository of money market instruments. The initial paid up capital of DFHI is Rs.150 crores.Apart from this, it has lines of refinance from RBI and a line of credit from the consortium ofpublic sector banks.As the apex agency in the Indian money market, the DFHI has been playing an important roleever since its inception. It has been promoting the active participation of the scheduledcommercial banks and their subsidiaries, state and urban cooperative banks and all-Indianfinancial institutions in the money market.The objective is to ensure that short-term surplus and deficits of these institutions areequilibrated at market-related rates through inter-bank transactions and various money marketinstruments.In 1990-91 the DFHI opened its branches at Delhi, Calcutta, Madras, Ahmedabad and Banglorein order to decentralize its operations and provide money market facilities at the major moneymarket centers in the country.
Discount and Finance House of India Ltd. (DFHI), a unique institution of its kind, was set up in April 1988. The share capital of DFHI is Rs 200 crores, which has been subscribed by Reserve Bank of India (10.5%), Public sector banks (62%) and Financial Institutions (26.6%). The discount has been established to deal in money market instruments in order to provide liquidity in the money market. Thus the task assigned to DFHI is to develop a secondary market in the existing money market instruments.The establishment of a discount House was recommended by a WorkingGroup on Money market. The main objective of DFHI is to facilitate thesmoothening of the short term liquidity imbalances by developing an activemoney market and integrating the various segments of the money market.At preset DFHI’s activities are restricted to:1. dealing in 91 days and 364 days Treasury Bills2. re-discounting short term commercial bills.3. participating in the inert bank call money, notice money and termdeposits and4. Dealing in Commercial Paper and Certificate of deposits.5. Government dated SecuritiesTreasury bills are issued by Reserve bank of India on behalf of theGovernment of India. Such bills are sold at fortnightly auctions. TheDiscount House regularly participates in such auctions. Moreover, itprovides a ready market to other institutions/individuals to buy or sell theTreasury Bills. It purchases the same either as outright purchase or on repos basis. Repos mean the right to re-purchase the same bills again. For this purpose the DFHI quotes two wayprices with fine spread. Such operations in Treasury Bills impart greaterflexibility to banks in their funds management. Moreover, with the creationof a secondary market for treasury Bills, corporate bodies and otherinstitutions could also invest their short term surplus funds in such bills.Re-discounting of commercial Bills:The Discount House aims at imparting liquidity to Commercial bills whichhave already been discounted by banks and financial institutions. It furtherre-discounts them and also enables banks and other institutions to re-discount from it such bills. For this purpose DFHI announces its bid andoffers re-discount rates on a fortnightly basis.Call Money Market and Term Deposit: DFHI has been permitted by theReserve bank of India to operate in the inter-bank call money market, bothas lender and borrower of overnight call and notice money up to 14 days.
DFHI also renders service to banks in the call money market by arrangingor placing funds for banks.The DFHI is authorized to argument its resources with lines of credit fromsector and refinance lines from the Reserves bank, The amount and therate of interest charged by Reserve Bank on refinance would be flexible, sothat Reserve Bank can have its impact on the money market by varying thequantum of refinance and the rate of interest thereon.Small Industries Development Bank of India:In the field of financing of small scale industries in India, a separate apexdevelopment bank has started its operations from April 2, 1990. The smallindustries Development Bank of India (SIDBI) has been set up as an Act ofparliament and the principal financial institution for promotion, financing anddevelopment of industry in the tiny and small scale sector. It coordinatesthe functions of other institutions engaged in similar activities.The SIDBI was established as a wholly-owned subsidiary of the IndustrialDevelopment bank of India. It has taken over IDBI’s financing activitiesrelating to the small scale sector.The major activities undertaken by this bank are as follows: 1. Refinancing of term loans granted by banks and other eligible financial institutions, namely the state Financial Corporation and State industrial Development Corporations. 2. Direct discounting as well as re-discounting of bills arising out of sale of machinery of capital equipment by manufacturers in small scale sector on deferred credit. 3. Equity type assistance under national Equity Funds and by way of seed capital to entrepreneurs 4. Re-discounting of short term bills arising out of sale of products of small scale sector. 5. Sources support to National Small industries Corporation and other institutions concerned with small industries 6. Share capital and resources support to factoring organizations
Overview of financial institutionsFinancial institutions are those Banking institutions which have a legal right to give away money forinterest on certain forms. Credit is being tightened up, people are upside down on their homes, and oilis starting to restrict mobility of most Americans. Yet the win attitude has not come forth from thefinancial sectors. They are just worried how they will come out of this economic mess. Everyoneaffected by this downturn is worried about the same thing. Being an optimist I see the most incredibleopportunity for these institutions. The opportunity is to help families and small businesses figure outwhat they need to do to weather this economic storm. Let us look at some background then I can takeyou through the opportunity portion of this leadership idea.Social responsibility plays an important role in upcoming financial institutions. The core of this ispeople. People who may have hit on hard times, maybe just need more cash to pay for the elevatedprices on food, utilities and gas for the family car. The families affected have solutions that may belimited by what they already know. Families may take the route of drawing down their savingsaccounts, 401ks, IRAs or stop any savings altogether. There are groups out there working onimproving family credit worthiness and saving homes from the foreclosure markets, which is a goodthing to do.Leadership qualitiesIt is the personal touch that can show leadership qualities. It raises the awareness of what families arefacing now, not tomorrow. You can send out little flyers or even little forms for them to fill out. That isimpersonal and usually wont help anyone with the hit and miss of mailers. This will open the door ofopportunity for clients to save more and have a longer term view. Assist them in confronting theirspending behavior. There are little things that one can do to save bundles of money. So many peoplehave a phone but do they have the right money saving service? Are they watering their lawn toomuch? Do they leave the lights on in every room? Is the air conditioner set too low? When they shopdo they go 5 or 10 miles to save fifty cents on a product?When they do go shopping, are the routes taken saving gas or wasting it? Some people pass right bythe store that they will go to the following day. They should have there shopping list done the nightbefore and just pick up what they need on the way back home.Home loans require collateral and with this, make sure you do have that before engaging on the loanand also do make sure that you are able to pay off your loan within the given duration. When you areconsidering on taking a loan, be aware of how secure the financial institution is. Make an effort to knowmore of your financial institution. Do some research background on them and make comparison onwho can give you the better deal and services.People often take for granted as taking a loan is not free of cost as it comes for a price. To have inmind all these factors the financial institutions are upgrading day by day. Dont take things lightly as ifyou are not aware of the procedure, with one mistake you can be charged under the legal law. And so,read carefully for all your contracts/agreements. Make sure that you have all the right information thatis needed for example, the interest rate, foreclosure, payment and etc.Home loans are useful loans that come in handy with an easy procedure but security should beoffered. Security is the most important factor of all loans especially home loans. Always remember toget yourself a secure home loan where you dont need to always worry about it every time. Financialinstitutions are not an easy go at times hence you don’t want to be at the losing end as in terms ofdebts. . If you have gotten yourself a trustworthy financial institution and an agreement/contract thatcan hardly be breached, you have successfully gained a secured deal for your future. Financialinstitutions are providing loans with interest so that they have an upper hand on the debtor. Thisusually happens everywhere. One could probably get low interest on student loan because there issome consideration on that.Read More: Overview On Financial Institutions - Zuuply.comhttp://www.zuuply.comTreasury bill marketttt
ttttTreasury Bills:Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowingsof the Government. Treasury bill market refers to the market where treasury bills are bought and sold.Treasury bills are very popular and enjoy higher degree of liquidity since they are issued by thegovernment.Meaning and Features of Treasury Bills:A treasury bills nothing but promissory note issued by the Government under discount for a specifiedperiod stated therein. The Government promises to pay the specified amount mentioned therein to thebearer of the instrument on the due date. The period does not exceed a period of one year. It is purely afinance bill since it does not arise out of any trade transaction. It does not require any ‘grading’ or’endorsement’ or ‘acceptance’ since it is clams against the Government. Treasury bill are issued only bythe RBI on behalf of the Government. Treasury bills are issued for meeting temporary Governmentdeficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in theentire structure of interest rates in the country because of short-term maturity and degree of liquidity andsecurity.Types of Treasury BillsIn India, there are two types of treasury bills viz. (I) ordinary or regular and (ii) ‘ad hoc’ known as ‘ad hocs’ordinary treasury bills are issued to the public and other financial institutions for meeting the short-termfinancial requirements of the Central Government. These bills are freely marketable and they can bebrought and sold at any time and they have secondary market also.On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold through tenderor auction. They are purchased by the RBI on top and the RBI is authorised to issue currency notesagainst them. They are marketable sell them back to the RBI. Ad hocs serve the Government in thefollowing ways: They replenish cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through these ad hocs. They also provide an investment medium for investing the temporary surpluses of State Government, semi-government departments and foreign central banks.On the basis of periodicity, treasury bills may be classified into three they are: 1. 91 Days treasury bills, 2. 182 Days treasury bills, and 3. 364 Days treasury bills.
Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by theparticipants and accepted by the authorities. Such a rate is called cut off rate. In the same way, the rate isfixed for 91 days treasury bills sold through auction. 91 days treasury bills (top basis) can be rediscountedwith the RBI at any time after 14 days of their purchase. Before 14 days a penal rate is charged.Operations and ParticipantsThe RBI holds day’s treasury bills (TBs) and they are issued on top basis throughout the week. However,364 days TBs are sold through auction which is conducted once in a fortnight. The date of auction andthe last date of submission of tenders are notified by the RBI through a press release. Investors cansubmit more than one bid also. On the next working day of the date auction, the accepted bids with pricesare displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit thesame along with cheque for the amount due on RBI within 24 hours of the announcement of auctionresults.Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger(SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this accountinvests who do not have SGL account can purchase and sell TBs though DFHI. The DFHI does thisfunction on behalf of investors with the helps of SGL transfer forms. The DFHI is actively participating inthe auctions of TBs. It is playing a significant role in the secondary market also by quoting daily buyingand selling rates. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rateof interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TBmarket.The participants in this market are the followers: 1. RBI and SBI 2. Commercial banks 3. State Governments 4. DFHI 5. STCI 6. Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc. 7. Corporate customers 8. PublicThrough many participants are there, in actual practice, this market is in the hands at the banking sector.It accounts for nearly 90 % of the annual sale of TBs.
Importance of Treasury Bills: Safety: Investments in TBs are highly safe since the payment of interest and repayment of principal are assured by the Government. They carry zero default risk since they are issued by the RBI for and on behalf of the Central Government. Liquidity: Investments in TBs are also highly liquid because they can be converted into cash at any time at the option of the inverts. The DFHI announces daily buying and selling rates for TBs. They can be discounted with the RBI and further refinance facility is available from the RBI against TBs. Hence there is a market for TBs. Ideal Short-Term Investment: Idle cash can be profitably invested for a very short period in TBs. TBs are available on top throughout the week at specified rates. Financial institutions can employ their surplus funds on any day. The yield on TBs is also assured. Ideal Fund Management: TBs are available on top as well through periodical auctions. They are also available in the secondary market. Fund managers of financial institutions build portfolio of TBs in such a way that the dates of maturities of TBs may be matched with the dates of payment on their liabilities like deposits of short term maturities. Thus, TBs help financial manager’s it manage the funds effectively and profitably. Statutory Liquidity Requirement: As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio investments in TBs are taken into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can be readily converted into cash and thereby CRR can be maintained. Source Of Short-Term Funds: The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. It is a source of cheap finance to the Government since the discount rates are very low. Non-Inflationary Monetary Tool: TBs enable the Central Government to support its monetary policy in the economy. For instance excess liquidity, if any, in the economy can be absorbed through the issue of TBs. Moreover, TBs are subscribed by investors other than the RBI. Hence they cannot be mentioned and their issue does not lead to any inflationary pressure at all.( Recommended reading: Treasury bills and inflation control ) Hedging Facility: TBs can be used as a hedge against heavy interest rate fluctuations in the call loan market. When the call rates are very high, money can be raised quickly against TBs and invested in the call money market and vice versa. TBs can be used in ready forward transitions.Defects of Trasury Bills: Poor Yield: The yield form TBs is the lowest. Long term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times.
Absence Of Competitive Bids: Though TBs are sold through auction in order to ensure market rates for the investors, in actual practice, competitive bids are competitive bids are conspicuously absent. The RBI is compelled to accept these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular. Absence Of Active Trading: Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs is adversely affected. Call money Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and upto 14 days it is called Noticemoney otherwise the amount is known as Call money. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions Features o The call market enables the banks and institutions to even out their day-to- day deficits and surpluses of money. o Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements. o Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access Call/Notice money only as lenders. o It is a completely inter-bank market hence non-bank entities are not allowed access to this market. o Interest rates in the call and notice money market are market determined. T.Y.BFM MONEY MARKET6
yIn view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. yIt serves as an outlet for deploying funds on short term basis to the lenders having steady inflow of fund Commercial paper is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average. For the most part, commercial paper is a very safe investment because the financial situation of a company can easily be predicted over a few months. Furthermore, typically only companies with high credit ratings and credit worthiness issue commercial paper. Over the past 40 years, there have only been a handful of cases where corporations have defaulted on their commercial paper repayment. Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smaller investors can only invest in commercial paper indirectly through money market funds. Read more: http://www.investopedia.com/university/moneymarket/moneymarket4.asp#ixzz1dxkoLj1M