MONEY MARKET

 

•     MONEY MARKET
DR. SHASHI AGGARWAL

DR. SHASHI AGGARWAL

•     MONEY MARKET

•     MEANING OF MONEY  MARKET

1.       MONEY MARKET IS A SEGMENT OF THE FINANCIAL MARKET IN INDIA WHERE BORROWING AND LENDING OF SHORT TERM FUNDS TAKE PLACE

2.       IT IS A MARKET FOR SHORT TERM LOANS OR FINANCIAL ASSETS.

3.        IT IS A MARKET FOR LENDING AND BORROWING OF SHORT TERM FUNDS. IT DEALS WITH NEAR SUBSTITUTES FOR MONEY OR NEAR MONEY LIKE TRADE BILLS, PROMISSORY NOTES ETC.

4.       IT DEALS IN MONETARY ASSETS WHOSE PERIOD OF MATURITY IS UPTO ONE YEAR

5.       REGULATED BY RESERVE BANK OF INDIA

•     MEANING OF MONEY  MARKET

1. MONEY MARKET DOES NOT REFER TO A PARTICULAR PLACE WHERE SHORT TERM FUNDS ARE DEALT WITH.
2. INCLUDES ALL INDIVIDUALS,INSTITUTIONS AND INTERMEDIARIES DEALING WITH SHORT TERM FUNDS
3. THE TRANSACTIONS BETWEEN BORROWERS,LENDERS AND MIDDLEMEN TAKE PLACE THROUGH TELEPHONE,TELEGRAPH,MAILS AND AGENTS.
4. MEANING OF MONEY  MARKET
5. NO PERSONAL CONTACT OR PRESENCE OF TWO PARTIES IS ESSENTIAL
6. GEOGRAPHICAL NAME MAY BE GIVEN TO MONEY MARKET ACCORDING TO LOCATION

a)       LONDON MONEY MARKET

b)       NE YORK MONEY MARKET

c)        MUMBAI MONEY MARKET : CENTER FOR THE WHOLE INDIA

•     DEFINITION OF MONEY MARKET

•    CROWTHER,” THE MONEY MARKET IS THE COLLECTIVE NAME GIVEN TO THE VARIOUS FIRMS AND INSTITUTIONS DEAL IN THE VARIOUS GRADES OF NEAR MONEY

•    RBI : DEFINES THE MONEY MARKET,” A MARKET FOR SHORT TERM FINANCIAL ASSETS THAT ARE CLOSE SUBSTITUTES FOR MONEY,FACILITATES THE EXCHANGE OF MONEY FOR NEW FINANCIAL CLAIMS IN THE PRIMARY MARKET AS ALSO FOR FINANCIAL CLAIMS ALREADY ISSUED IN THE SECONDARY MARKET.

•     FEATURES

1.       PURELY FOR SHORT TERM FUNDS

2.       DEALS WITH FINANCIAL ASSETS HAVING A MATURITY PERIOD UP TO ONE YEAR.

3.       TRANSACTION MAY TAKE THROUGH PHONE AND ALSO CONDUCTED WITH THE HELP OF BROKERS

4.       COMPRISES OF VARIOUS SUB MARKET EACH SPECIALIZING IN PARTICULAR TYPE OF FINANCING ,EG. CALL MONEY MARKET, ACCEPTANCE MARKET AND BILL MARKET AND SO ON

5.       DEALS WITH ONLY THOSE ASSETS WHICH CAN BE CONVERTED INTO CASH READILY WITHOUT LOSS AND WITH MINIMUM TRANSACTIONS

 

•     MAIN PARTICIPANTS

•               MAIN PARTICIPANTS :-

1.       CENTRAL BANK

2.       COMMERCIAL BANK

3.       NON BANKING FINANCIAL COMPANIES

4.       MUTUAL FUNDS

5.       BIG CORPORATES

 

q      OBJECTIVES OF MONEY MARKET

1.       OVERCOMING SHORT TERM DEFICITS

2.       TO ENABLE THE CENTRAL BANK TO INFLUENCE AND REGULATE LIQUIDITY IN THE ECONOMY

3.       PARKING PLACE TO EMPLOY SHORT TERM SURPLUS FUNDS

4.       QUICK ACCESS TO SHORT TERM FUNDS AT REASONABLE COST

q      REQUISITES OF WELL DEVELOPED MONEY MARKET

1. HIGHLY ORGANIZED BANKING SYSTEM  : COMMERCIAL BANKS ARE THE NERVE CENTERS OF THE WHOLE MONEY MARKET. PRINCIPAL SUPPLIER OF SHORT TERM FUNDS. THEIR POLICIES REGARDING LOANS AND ADVANCES IMPACT THE ENTIRE MARKET
2. PRESENCE OF A CENTRAL BANK : CENTRAL BANKS ACTS AS THE BANKER’S BANKS. KEEPS CASH RESERVES AND PROVIDE FINANCIAL ACCOMMODATION IN DIFFICULTIES BY DISCOUNTING THEIR ELIGIBLE SECURITIES.
3. AVAILABILITY OF PROPER CREDIT INSTRUMENT : CONTINUOUS AVAILABILITY OF READILY ACCEPTABLE NEGOTIABLE SECURITIES.
4. EXISTENCE OF SUB MARKETS :  THE NUMBER OF SUB MARKETS DETERMINES THE DEVELOPMENT OF A MONEY MARKET. THE LARGER THE NUMBER OF SUB MARKETS,THE BROADER AND MORE DEVELOPED WILL BE THE STRUCTURE OF MONEY MARKET.
5. AMPLE RESOURCES : AVAILABILITY OF SUFFICIENT FUNDS TO FINANCE TRANSACTIONS
6. EXISTENCE OF A SECONDARY MARKET
7. DEMAND AND SUPPLY OF FUNDS

 

8. OTHER FACTORS :

a)       RAPID INDUSTRIAL DEVELOPMENT

b)       EMERGENCE OF STOCK EXCHNAGES’

c)        LARGE VOLUME OF INTERNATIONAL TRADE

d)       POLITICAL STABILITY

 

q      SIGNIFICANCE OF MONEY MARKET

1.       DEVELOPMENT OF TRADE AND INDSUTRY

2.       SMOOTH FUNCTIONING OF COMMERCIAL BANKS

3.       EFFECTIVE CENTRAL BANK CONTROL

4.       FORMULATION OF SUITABLE MONETARY CONTROL

5.       NON INFLATIONARY SOURCE OF FINANCE TO THE GOVERNMENT

•     COMPOSITION OF MONEY MARKET

q      CALL MONEY MARKET

1.       REFERS TO THE MARKET FOR EXTREMELY SHORT PERIOD LOANS

2.       THESE LOANS ARE REPAYABLE ON DEMAND AT THE OPTION OF EITHER THE LENDER OR BORROWER.

3.       THESE LOANS ARE  GIVEN TO BROKERS AND DEALERS IN STOCK EXCHANGE

4.       THE PARTICIPANTS IN THIS MARKET CAN BE CLASSIFIED INTO TWO CATEGORIES:-

5.       THOSE PERMITTED TO ACT AS BOTH LENDERS AND BORROWERS OF CALL LOANS . COMMERCIAL BANKS, COOPERATIVES BANKS,DFHI AND SECURITIES TRADING CORPORATION OF INDIA

6.       THOSE PERMITTED TO ACT ONLY AS LENDERS IN THE MARKET. LIC,GIC.IDBI AND NABARD AND SPECIFIED MUTUAL FUNDS

q      OPERATIONS IN THE CALL MARKETS

1.       BORROWER AND LENDER CONTACT THROUGH PHONE. IF THEY FINALIZE THE DEAL , THE LENDER ISSUES FBL CHEQUE IN FAVOR OF THE BORROWER AND THEN BORROWER ISSUES CALL MONEY BORROWING RECEIPT.

2.       CAN BE ROUTED THROUGH DISCOUNT AND FINANCE HOUSE OF INDIA. ONCE THE DEAL IS CONFIRMED, DEAL SETTLEMENT ADVICE IS EXCHANGED.

3.       IN CASE OF DFHI BORROWS , ISSUES CALL DEPOSIT RECEIPT TO THE LENDER AND RECEIVES RBI CHEQUE

4.       THE DULY DISCHARGED CALL DEPOSIT RECEIPT IS SURRENDERED AT THE TIME OF SETTLEMENT. CALL LOANS CAN BE RENEWED UPTO A MAXIMUM PERIOD OF 14 DAYS ONLY.

 

•     CALL LOAN MARKET TRANSACTIONS AND PARTICIPANTS

1.       COMMERCIAL BANKS TO MEET LARGE PAYMENTS AND LARGE REMITTANCE TO MAINTAIN LIQUIDITY WITH THE RBI

2.       STOCK BROKERS AND SPECULATORS

3.       TO THE BILL MARKET FOR MEETING MATURED BILL

4.        TO THE DISCOUNT AND FINANCE HOUSE OF INDIA AND THE  SECURITIES TRADING CORPORATIONS OF INDIA TO ACTIVATE THE CALL MARKET

5.       THE INDIVIDUALS OF VERY HIGH STATUS

•     DISADVANTAGES

1.       UNEVEN DEVELOPMENT

2.       LACK OF INTEGRATION

3.       VOLATILITY IN CALL MONEY RATES

•     ADVANTAGES

1.       HIGHLY LIQUID

2.       HIGH PROFITABILITY

3.       MAINTENANCE OF SLR

4.       SAFE AND CHEAP

5.       ASSISTANCE TO CENTRAL BANK OPERATIONS

•     COMMERCIAL BILL MARKET

§  ARISE OUT OF A GENUINE TRADE TRANSACTIONS,I.E., CREDIT TRANSACTION. WHEN THE GOODS ARE SOLD BY THE SELLER ON CREDIT , SELLER DRAWS A BILL ON THE BUYER FOR THE AMOUNT DUE. THE BUYER ACCEPTS IT IMMEDIATELY AGREEING TO PAY THE MENTIONED AMOUNT AT A CERTAIN SPECIFIED DATE.

§  A BILL OF EXCHANGE CONTAINS A WRITTEN ORDER FROM THE CREDITORS TO THE DEBTORS TO PAY A CERTAIN SUM TO A CERTAIN PERSON AFTER A CERTAIN PERIOD.

q      TYPES OF BILLS

1. DEMAND AND USANCE BILLS : DEMAND BILLS ARE CALLED SIGHT BILLS. PAYABLE IMMEDIATELY AS SOON THEY ARE PRESENTED TO THE DRAWEE. USANCE BILLS ARE CALLED TIME BILLS
2. CLEAN BILLS AND DOCUMENTARY BILLS : WHERE BILLS HAVE TO BE ACCOMPANIED BY DOCUMENTS OF TITLE TO THE GOODS LIKE RAILWAY RECEIPT/LORRY RECEIPT/BILL OF LADING. DOCUMENTARY BILLS. BILLS CAN BE FURTHER CLASSIFIED : D/A AND D/P
3. INLAND AND FOREIGN BILLS: INLAND BILLS ARE DRAWN UPON A PERSON WHO IS RESIDENT IN INDIA AND ARE PAYABLE IN INDIA
4. FOREIGN BILLS ARE DRAWN OUTSIDE INDIA AND MAY BE PAYABLE IN INDIA OR OUTSIDE INDIA. ALSO INCLUDES BILL DRAWN IN INDIA AND PAYABLE OUTSIDE INDIA
5. EXPORT BILLS AND IMPORT BILLS
6. INDIGENOUS BILLS
7. ACCOMMODATION BILLS AND SUPPLY BILLS : ACCOMMODATION BILLS ARE NOT FOR GENUINE TRADE TRANSACTIONS. ALSO KNOWN AS KITE BILLS OR WINDS BILLS
8. SUPPLY BILLS ARE THOSE  DRAWN BY SUPPLIERS OR CONTRACTORS ON THE GOVERNMENT DEPARTMENTS FOR THE GOODS SUPPLIED BY THEM. NOT CONSIDERED AS NEGOTIABLE. ONLY USEFUL FOR GETTING LOANS AND ADVANCES FROM BANKS

•     OPERATIONS IN THE BILL MARKET

•    DISCOUNT MARKET : WHERE SHORT TERM BILLS ARE DISCOUNTED BY FINANCIAL INTERMEDIARIES LIKE COMMERCIAL BANKS

•    ACCEPTANCE MARKET :ALL TRADE BILLS ARE NOT DISCOUNTED EASILY. ACCEPTED BY FINANCIAL INTERMEDIARIES. BILLS EARN GOOD NAME AND REPUTATION AND CAN BE EASILY DISCOUNTED

•     ADVANTAGES

1.       BILLS ARE HIGHLY LIQUID ASSETS

2.       BILLS ARE SELF LIQUIDATED AS THEY HAVE A FIXED TENURE

3.       BILLS ARE DRAWN AND ACCEPTED BY BUSINESS PEOPLE AND CERTAINTY OF PAYMENTS

4.       BILLS ARE NOT PERIOD EXCEEDING 6 MONTHS AND IDEAL FOR INVESTMENT FOR FINANCIAL INTERMEDIARIES

5.       LEGAL REMEDY IN CASE OF DISHONOUR

•     DRAWBACKS

1.       ABSENCE OF BILL CULTURE

2.       ABSENCE OF RE DISCOUNTING AMONG BANKS

3.       STAMP DUTY

4.       ABSENCE OF SECONDARY MARKET

5.       DIFFICULTY IN ASCERTAINING GENUINE TRADE TRANSACTIONS

·         TREASURY BILLS IN INDIA

1.       FIRST ISSUED IN 1917

2.       THEY ARE ISSUED VIA AUCTIONS BY THE RBI AT REGULAR INTERVAL

3.       INDIVIDUALS.TRUSTS,INSTITUTIONS AND BANK CAN PURCHASE THE T BILLS

4.       USUALLY HELD BY THE FINANCIAL INSTITUTIONS

5.       VERY IMPORTANT ROLE THEY PLAY IN FINANCIAL MARKET

6.       BANKS GIVE TREASURY BILLS TO RBI TO GET MONEY UNDER REPO RATE

7.       BANKS ALSO KEEP TO FUFILL THEIR STATUTORY LIQUID RATIO REQUIREMENTS.

q      TREASURY BILL MARKET

1. REPRESENT SHORT TERM BORROWINGS OF THE GOVT. TREASURY BILL MARKET REFERS TO THE MARKET WHERE TREASURY BILLS ARE BOUGHT AND SOLD.
2. A TREASURY BILL IS NOTHING BUT A PROMISSORY NOTE ISSUED BY THE GOVT UNDER DISCOUNT FOR A SPECIFIED PERIOD THEREIN.
3. PURELY A FINANCE BILL BECAUSE IT DOES NOT ARISE OUT OF ANY TRADE TRANSACTION. IT IS  A CLAIM AGAINST THE GOVERNMENT.
4. TREASURY BILLS ( T BILLS) _-- IS A SHORT TERM INSTRUMENTS OF MONEY MARKET ISSUED BY RBI ON BEHALF OF INDIAN GOVERNMENT.
5. ISSUED TO MEET THE TEMPORARY NEEDS FOR FUND OF THE GOVERNMENT
6. TREASURY BILLS ARE AVAILABLE FOR A MINIMUM AMOUNT OF RS 25,000  AND IN MULTIPLES THEREOF
7. THESE ARE KNOWN AS ZERO COUPON BONDS SINCE THEY DO NOT PAY ANY INTEREST BUT THE ISSUE PRICE IS LESS THAN REDEMPTION PRICE. THE DIFFERENCE BETWEEN ISSUE PRICE IS LESS THAN REDEMPTION PRICE IS INTEREST RECEIVABLE ON IT.
8. IT IS HIGHLY LIQUID,HAS ASSURED RETURN AND NEGLIGIBLE RISK OF DEFAULT

q      TYPES OF TREASURY BILLS

1.       ORDINARY OR REGULAR

2.       AD HOC

•     TREASURY BILLS

•     REGULAR:ARE  ISSUED TO PUBLIC AND OTHER FINANCIAL INSTITUTIONS FOR MEETING THE SHORT TERM FINANCIAL REQUIREMENTS OF CENTRAL GOVERNMENTS. THESE BILLS ARE FREELY MARKETABLE AND ALSO THEY HAVE SECONDARY MARKET ALSO.

•     AD HOCS ARE ALWAYS ISSUED IN FAVOR OF THE RBI ONLY. NOT SOLD THROUGH TENDER OR AUCTION. THEY ARE PURCHASED BY THE RBI AND RBI IS AUTHORIZED TO ISSUE CURRENCY NOTES AGAINST THEM. THEY ARE NOT MARKETABLE IN INDIA.

 

•     CLASSIFICATION ON THE BASIS OF PERIODICITY

 

1.       91 DAYS TREASURY BILLS . AUCTIONED ON WEDNESDAY AND PAYMENT IS MADE ON FOLLOWING FRIDAY.INTRODUCED IN JAN 1993. ALSO ISSUED AT FIXED DISCOUNT RATE OF 4% AS WELL AS THROUGH AUCTIONS. CAN BE DISCOUNTED WITH RBI AT ANY TIME AFTER 14 DAYS

2.       182 DAYS TREASURY BILLS

3.       364 DAYS TREASURY BILLS. ALSO SOLD BY AUCTION . CONDUCTED ONCE IN FORTNIGHT

 

q      OPERATIONS AND PARTICIPANTS

1.       91 DAYS TREASURY BILLS AND THEY ARE ISSUED ON TAP BASIS THROUGHOUT THE WEEK.

2.       364 DAYS TBS ARE SOLD THROUGH AUCTION WHICH IS CONDUCTED ONCE IN A FORTNIGHT.

3.       THE DATE OF AUCTION AND THE LAST DATE OF SUBMISSION OF TENDERS ARE NOTIFIED BY THE RBI THROUGH A PRESS RELEASE.

4.       INSTITUTIONAL INVESTORS LIKE COMMERCIAL BANKS, DFHI,STCI, ETC, MAINTAIN A SUBSIDIARY GENERAL LEDGER ACCOUNT WITH RBI. INVESTORS NOT HAVING SGL ACCOUNT CAN PURCHASE AND SELL TBS THROUGH DFHI

1.       FEATURES

1.       T – BILLS ARE ISSUED EITHER IN PHYSICAL FORM AS PROMISSORY NOTE OR DEMAT

2.       INDIVIDUALS,FIRMS,COMPANIES,TRUST,BANKS,INSURANCE COMPANIES,PROVIDENT FUND ,STATE GOVERNMENT AND FINANCIAL INSTITUTIONS ARE ELIGIBLE TO INVEST IN TREASURY BILLS.

3.       MINIMUM AMOUNT OF BID IS 25,000 AND MULTIPLE THEREOF

4.       ISSUED AT DISCOUNT BUT PAID AT PAR VALUE

5.       HIGHLY LIQUID NEGOTIABLE INSTRUMENTS IN BOTH FINANCIAL MARKET : PRIMARY AND SECONDARY

•     MERITS

1.       IDEAL FUND MANAGEMENT : AVAILABLE AT TAP OR AUCTION

2.       STATUTORY LIQUIDITY RESERVES OF THE BANKS

3.       SHORT TERM REQUIREMENTS

4.       NON INFLATIONARY MONETARY TOOLS

5.       CAN BE USED AS HEDGE. WHEN THE CALL RATES ARE HIGH. MONEY CAN BE QUICKLY RAISED AGAINST TBS AND INVESTED IN THE CALL MONEY MARKET

6.       INVESTMENT IN TBS ARE HIGHLY SAFE

7.       HIGH LIQUID. CAN BE CONVERTED INTO CASH AT ANY TIME AT THE OPTION OF THE INVESTORS. THE DISCOUNT AND FINANCE HOUSE OF INDIA ANNOUNCES DAILY BUYING AND SELLING RATES. DISCOUNTED WITH RBI AND FURTHER REFINANCE FACILITY IS ALSO AVAILABLE WITH RBI

8.       IDEAL SHORT TERM INVESTMENT

•     DRAWBACKS

1.       POOR YIELD

2.       ABSENCE OF COMPETITIVE BIDS

3.       ABSENCE OF ACTIVE TRADING

•     MONEY MARKET INSTRUMENTS

•     THE INSTRUMENTS ARE :-

1.       TREASURY BILLS

2.       MONEY AT CALL AND SHORT NOTICE IN THE CALL LOAN MARKET

3.       COMMERCIAL BILLS, AND PROMISSORY NOTES

§  IN ADDITION TO THE ABOVE MENTIONED INSTRUMENTS , THE FOLLOWING NEW INSTRUMENTS ARE AVAILABLE:-

1.       COMMERCIAL PAPERS

2.       CERTIFICATE OF DEPOSIT

3.       INTER BANK PARTICIPATION CERTIFICATES

4.       REPO INSTRUMENTS

 

•     COMMERCIAL PAPER

1.       ARE UNSECURED MONEY MARKET INSTRUMENT IN THE FORM OF PROMISSORY NOTES

2.       INTRODUCED IN INDIA IN 1990 WITH A VIEW TO ENABLING HIGHLY RATED CORPORATES BORROWERS TO DIVERSIFY THEIR SOURCE OF SHORT TERM BORROWING AND TO PROVIDE AN ADDITIONAL INSTRUMENTS TO INVESTORS.

3.       INTRODUCED ON THE RECOMMENDATION OG VAGUL WORKING GROUP

•     FEATURES OF COMMERCIAL PAPER

1. SHORT TERM MONEY MARKET INSTRUMENT COMPRISING USANCE PROMISSORY NOTES WITH FIXED MATURITY
2. CERTIFICATE EVIDENCING UNSECURED CORPORATE DEBT OF SHORT TERM MATURITY
3. ISSUED AT DISCOUNT VALUE BUT IT CAN ALSO BE ISSUED AT INTEREST BEARING
4. CAN BE ISSUED DIRECTLY BY COMPANY TO INVESTORS OR THROUGH BANKS/MERCHANT BANKERS

 

5. CAN BE ISSUED IN DENOMINATION OF RS 5 LACS OR MULTIPLES THEROF
6. INDIVIDUALS,BANKING COMPANIES,OTHER CORPORATES BODIED ( REGISTERED OR INCORPORATED IN INDIA) AND UNCORPORATED BODIES,NON RESIDENT INDIAN AND FOREIGN INSTITUTIONAL INVESTORS ( SUBJECT TO WITH IN THE LIMITS SET BY SEBI)
7. ALSO CALLED BRIDGE FINANCE
8. FOR EXAMPLE A COMPANY WANTS TO RAISE LONG TERM FUNDS AND FOR THIS PURPOSE IT WILL HAVE TO INCUR FLOTATION COSTS. THESE EXPENSES MAY BE MET THROUGH COMMERCIAL PAPER.

•     WHO CAN ISSUE COMMERCIAL PAPER

1.       NON BANKING FINANCE COMPANIES

2.       ALL INDIA FINANCIAL INSTITUTIONS

3.       OTHER ENTITIES WITH NET WORTH OF RS 100 CRORES OR HIGHER

4.       COOPERATIVE SOCIETIES/UNIONS

5.       GOVERNMENT ENTITIES

6.       TRUSTS

7.       LIMITED LIABILITY PARTNERSHIP

8.       ANY OTHER BODY CORPORATE HAVING PRESENCE IN INDIA

9.       ANY OTHER ENTITY SPECIALLY PERMITTED BY RBI

•     ELIGIBILITY CRITERIA

1.       TOTAL NET WORTH OF AT LEAST 4 CRORES WITH RESPECT TO RECENT BALANCE SHEET

2.       THE WORKING CAPITAL LIMIT OF THE FIRM SHOULD NOT BE LESS THAN 4 CRORES

3.       CURRENT RATIO SHOULD NOT BE LESS THAN 1,33

4.       A MINIMUM OF P2/A2 RATING SHOULD BE MAINTAINED BY THE FIRM FROM CARE/ICRA/CRISIL OR ANY APPROVES CREDIT RATING AGENCIES

5.       THE CREDIT RATING SHOULD NOT BE LESS THAN TWO MONTH OLD

6.       THE FIRM’S BORROWING ACCOUNT WILL BE CLASSIFIED AS A STANDARD ASSET BY FINANCING COMPANIES

 

7.       FROM THE DATE OF ISSUE THE MATURITY IS A MINIMUM OF 7 DAYS AND A MAXIMUM OF ONE YEAR

8.       CP SHOULD NOT BE ISSUED IF THE CREDIT RATING IS NO LONGER VALID

9.       THE DENOMINATIONS FOR ISSUING CP SHOULD BE RS 5 LACS AND MULTIPLE OF THIS AMOUNT

10.    AN AMOUNT NOT LESS THAN 5 LACS SHOULD BE INVESTED BY A SINGLE INVESTOR

11.    EVERY ISSUE OF CP AND EVERY RENEWAL OF CP SHALL BE TREATED AS FRESH ISSUE

12.    NO ISSURE SHALL HAVE THE ISSUE OF CP UNDERWRITTEN OR CO ACCEPTED

 

•     PROCEDURE

1.       EVERY ISSUER MUST APPOINT AN ISSUING AND PAYING AGENT FOR ISSUANCE OF CP

2.       SHOULD DISCLOSE TO THE POTENTIAL INVESTOR THE LATEST FINANCIAL POSITION AS PER THE STANDARD MARKET PRACTICES

3.       AFTER THE EXCHANGE OF CONFIRMATION OF THE DEAL BETWEEN THE INVESTOR AND THE ISSUER THE ISSUER SHALL ARRANGE FOR THE CREDITING THE CP TO THE DEMAT ACCOUNT OF THE INVESTOR WITH THE DEPOSITORY THROUGH IPA

4.       THE ISSUER SHOULD GIVE TO THE INVESTOR A COPY OF IPA CERTIFICATE

5.       SHALL OBTAIN CREDIT RATING FOR ISSUANCE OF CP FROM THE REGISTERED SEBI CRAS AND THE MINIMUM CREDIT RATING SHALL BE A3

•     CERTIFICATE OF  DEPOSIT

1.       SHORT TERM DEPOSIT INSTRUMENTS ISSUED BY BANKS AND FINANCIAL INSTITUTIONS TO RAISE LARGE SUMS OF MONEY.

2.       ISSUED IN THE FORM OF USANCE PROMISSORY NOTES

3.       THEY ARE NEGOTIABLE AND ARE IN MARKETABLE FORM

4.       BEAR SPECIFIC FACE VALUE AND MATURITY

5.       TRANSFERABLE FROM ONE PARTY TO ANOTHER

6.       THE BANKS IN THE USA INTRODUCED CDS IN 1960

7.       RBI LAUNCHED A SCHEME IN JUNE 1989 PERMITTING BANKS TO ISSUE CDS : WIDENING THE RANGE OF MARKET MONEY INSTRUMENTS ( VAGUL COMMITTEE )

•     FEATURES OF CERTIFICATE OF DEPOSITS

1.       DOCUMENT OF TITLE TO TIME DEPOSIT

2.       UNSECURED NEGOTIABLE PRONOTES

3.       FREELY TRANSFERABLE BY ENDORSEMENT AND DELIVERY

4.       ISSUE AT DISCOUNT TO FACE VALUE

5.       REPAYABLE ON FIXED DATE WITHOUT RACE DAYS

6.       SUBJECT TO STAMP DUTY

 

•     CERTIFICATE OF  DEPOSIT

•   ISSUERS : COMMERCIAL BANKS (EXCLUDING REGIONAL RURAL BANKS AND LOCAL AREA BANKS),FINANCIAL INSTITUTIONS ETC

•   SUBSCRIBERS : ARE AVAILABLE FOR SUBSCRIPTION BY INDIVIDUALS,CORPORATIONS,TRUSTS AND NRIS

 

•     GUIDELINES

1.       BANKS HAVE FREEDOM TO ISSUE CDS

2.       FINANCIAL INSTITUTE WITH IN THE OVER ALL UMBRELLA LIMIT PRESCRIBED IN THE RESOURCE RAISING NORMS FOR FI

3.       MINIMUM AMOUNT OF CD SHOULD NOT BE LESS THAN ONE LACS

4.       MINIMUM DEPOSIT THAT COULD BE ACCEPTED FROM A SINGLE SUBSCRIBER SHALL NOT LESS THAN ONE LACS AND MULTIPLE OF ONE LACS

5.       MATURITY PERIOD OF CD ISSUED BY BANKS SHALL NOT BE LESS THAN 7 DAYS AND NOT MORE THAN ONE YEAR FROM THE DATE OF ISSUE

6.       GUIDELINES

7.       FIS CAN ISSUE CDS FOR PERIOD NOT LESS THAN ONE YEAR AND NOT EXCEEDING 3 YEARS FROM DATE OF ISSUE

8.       CDS MAY BE ISSUED AT DISCOUNT ON FACE VALUE

9.       BANKS HAVE TO MAINTAIN APPROPRIATE RESERVE REQUIREMENTS –CASH RESERVE RATIO AND STATUTORY LIQUIDITY RATIO

10.    TRANSFER ABILITY: CERTIFICATES THAT ARE AVAILABLE IN DEMAT FORMS MUST BE TRANSFERRED ACCORDING TO THE GUIDELINES FOLLOWED BY DEMAT SECURITIES. WHILE DEMATERIALISED/ELECTRONIC CERTIFICATES CAN BE TRANSFERRED BY ENDORSEMENT OR DELIVERY

11.    NON-AVAILABILITY OF LOAN: SINCE THESE INSTRUMENTS DO NOT HAVE ANY LOCK-IN PERIOD, BANKS DO NOT GRANT LOANS AGAINST THEM. IN FACT, BANKS CANNOT EVEN BUY BACK CERTIFICATES OF DEPOSIT BEFORE MATURITY

 

•     ADVANTAGES

•    MOST CONVENIENT INSTRUMENT TO DEPOSITORS

•    OFFERS MAXIMUM LIQUIDITY

•    IT IS A VEHICLE TO RAISE SOURCES IN TIMES OF NEEDS AND IMPROVE THEIR LENDING CAPACITY FOR ISSUING BANKS

•    IDEAL INSTRUMENTS FOR BANKS WITH SHORT TERM SURPLUS FUNDS TO INVEST AT ATTRACTIVE RATES

•     Annex I FORMAT OF CD

•     Name of the bank/institution No. Rs.----------------- Dated --------------------- NEGOTIABLE CERTIFICATE OF DEPOSIT -------------------------- months/days after the date hereof, ------ --------------------,at ----------------, hereby promise to pay to ------- ------- or order the sum of Rupees ------------------- only, upon presentation and surrender of this instrument at the said place, for deposit received. For ---------- Date of maturity ----------------------------- without days of grace.

•     Instructions   Endorsements     Date

•     CERTIFICATE OF DEPOSIT

1.       CERTIFICATE OF DEPOSIT : IS A MONEY MARKET INSTRUMENT WHICH ISSUED IN DEMAT FORM

2.       RBI ISSUES GUIDELINES FOR THE CD FROM TIME TO TIME

3.       ONLY SCHEDULED COMMERCIAL BANKS/FINANCIAL INSTITUTIONS IN INDIA CAN ISSUE CERTIFICATE OF DEPOSIT

4.       ISSUED TO INDIVIDUALS,COMPANIES,FUNDS AND CAN BE ISSUED TO NR ON NON REPATRIATE BASIS

5.       MATURITY PERIOD RANGE FROM 7 DAYS TO ONE YEAR

6.       UNSECURED AND NEGOTIABLE

•     INTER –BANK PARTICIPATION CERTIFICATE

•     THE INTER BANK PARTICIPATION CERTIFICATE ARE INSTRUMENTS ARE ISSUED BY  SCHEDULED COMMERCIAL BANKS TO RAISE FUNDS OR TO DEPLOY SHORT TERM SURPLUS. THIS INSTRUMENT IS ISSUED FOR TWO PURPOSES:-

1.       ON RISK SHARING BASIS ( 90 DAYS TO 180 DAYS)

2.       WITHOUT SHARING ( TENURE IS 90 DAYS)

 

•     INTER –BANK PARTICI PATION CERTIFICATE

•     RESERVE BANK OF INDIA HAS PERMITTED FOREIGN BANKS AND PRIVATE SECTOR BANKS TO TREAT THEIR INVESTMENTS IN INTER BANK PARTICIPATORY CERTIFICATE (IBPC) TO TREAT IT AS DIRECT LENDING TO THE PRIORITY SECTOR. A BANK MISSING ITS TARGET FOR PRIORITY SECTOR LENDING TARGET WILL BE ABLE TO REACH THE TARGET BY BUYING IBPCS ISSUED BY THE FELLOW BANKS THAT HAVE ALREADY EXCEEDED IN ACHIEVING THEIR REGULATORY TARGETS OF PRIORITY SECTOR ADVANCES AND ISSUED IBPCS FOR EXCESS OF LENDING UNDER VARIOUS CATEGORIES OF PRIORITY SECTOR.

•     THERE ARE TWO TYPES OF INTER-BANK PARTICIPATION CERTIFICATES (IBPCS); ONE ON RISK SHARING BASIS AND THE OTHER WITHOUT RISK SHARING.

•      IN CASE OF IBPC WITHOUT RISK SHARING, A BANK MISSING THE TARGET CAN ALWAYS BUY IBPC INSTRUMENT ISSUED BY ANOTHER BANK AT A PRICE FOR A MONTH OR SO. LATER, THE SELLER BANK CAN BUY BACK THE PORTFOLIO.

•     THE IBPC ON RISK SHARING CAN BE ISSUED FOR 91-180 DAYS AND ONLY IN RESPECT OF ADVANCES CLASSIFIED UNDER STANDARD STATUS WHERE THE CONDUCT OF ACCOUNT IS SATISFACTORY, THE SAFETY OF ADVANCE IS NOT IN DOUBT, AND ALL THE TERMS AND CONDITIONS ARE COMPLIED WITH.  

•     THE AGGREGATE AMOUNT OF SUCH IBPCS UNDER ANY LOAN ACCOUNT AT THE TIME OF ISSUE IS NOT TO EXCEED 40 PER CENT OF THE OUTSTANDING IN THE ACCOUNT. RRBS CAN ALSO ISSUE INTER‐BANK PARTICIPATION CERTIFICATES (IBPC) OF A TENOR OF 180 DAYS ON RISK SHARING BASIS TO SCHEDULED COMMERCIAL BANKS AGAINST THEIR PRIORITY SECTOR ADVANCES IN EXCESS OF 60% OF THEIR OUTSTANDING ADVANCES

•     REPO INSTRUMENTS

•     REPO TRANSACTION, THE BORROWER PARTS WITH SECURITIES TO THE LENDER WITH AN AGREEMENT TO REPURCHASE THEM AT THE END OF THE FIXED PERIOD AT SPECIFIED PRICE. AT THE END OF THE PERIOD THE BORROWER WILL REPURCHASE THE SECURITIES AT THE PREDETERMINED PRICE.

•     A REVERSE REPO IS THE MIRROR IMAGE OF A REPO. FOR, IN A REVERSE REPO, SECURITIES ARE ACQUIRED WITH A SIMULTANEOUS COMMITMENT TO RESELL . HENCE WHETHER A TRANSACTION IS A REPO OR A REVERSE REPO IS DETERMINED ONLY IN TERMS OF WHO INITIATED THE FIRST LEG OF THE TRANSACTION

•     . WHEN THE REVERSE REPURCHASE TRANSACTION MATURES, THE COUNTERPARTY RETURNS THE SECURITY TO THE ENTITY CONCERNED AND RECEIVES ITS CASH ALONG WITH A PROFIT SPREAD. ONE FACTOR WHICH ENCOURAGES AN ORGANISATION TO ENTER INTO REVERSE REPO IS THAT IT EARNS SOME EXTRA INCOME ON ITS OTHERWISE IDLE CASH.. ELIGIBLE SECURITIES ARE DECIDED BY THE RBI. THESE ARE USUALLY GOVERNMENT, PROMISSORY NOTES, TREASURY BILLS AND PUBLIC SECTOR BONDS.

•     REPO RATE

 

•     THE REPO RATE IS THE RATE AT WHICH THE RBI LENDS MONEY TO THE BANKING SYSTEM (OR BANKS) FOR SHORT DURATION. THE REVERSE REPO RATE IS THE RATE AT WHICH BANKS CAN PARK THEIR MONEY WITH THE RBI.

•     RBI BUYS GOVERNMENT SECURITIES FROM COMMERCIAL BANKS AT A DISCOUNTED PRICE. THE RATE AT WHICH IT IS DISCOUNTED IS THE REPO RATE. AFTER THE AGREED TENURE, THE RESPECTIVE COMMERCIAL BANK REPURCHASE THOSE GOVERNMENT SECURITIES FROM RBI

.

 

•    COMPONENTS OF REPO RATE

•    THE LOAN GIVEN BY BANKS IS FOR OVERNIGHT OR ONE DAY.

•    BANKS SELL APPROVED GOVERNMENT SECURITIES THAT ARE ABOVE THE SLR LIMIT.

•    THE INTEREST CHARGED BY RBI ON THE ADVANCED LOAN IS CALLED THE REPO RATE.

•    THE LOAN AVAILED BY BANKS ARE REPAID AFTER ONE DAY, AND THE SECURITIES SUBMITTED AS COLLATERAL IS REPURCHASED.

 

q      IMPORTANCE OF MONEY MARKET

1.       DEVELOPMENT OF TRADE AND INDUSTRY

2.       DEVELOPMENT OF CAPITAL MARKET

3.       SMOOTH FUNCTIONING OF COMMERCIAL BANK

4.       EFFECTIVE CENTRAL BANK

5.       FORMULATION OF SUITABLE POLICY

6.       NON INFLATIONARY SOURCE OF FINANCE TO GOVT

•     DEFICIENCY OF THE INDIAN MONEY MARKET

1.       EXISTENCE OF UNORGANIZED MONEY MARKET

2.       LACK OF INTEGRATION

3.       DISPARITY OF INTEREST RATES

4.       SEASONAL DIVERSITY OF MONEY MARKET

5.       LACK OF PROPER BILL MARKET

6.       LACK OF WELL ORGANIZED BANKING SYSTEM