Financial Market - Money Market

Maturity Period less than 1 Year, with High Liquidity

• Money Market is a place for short term lending and borrowing, typically within a year.
• It deals in short term debt financing and investments with high liquidity.
• It meets the short term requirement of the borrowers and provides liquidity or cash to the lenders.
• Banks borrow in the money market to:
• Fill the gaps or temporary mismatch of funds.
• To meet the CRR and SLR mandatory requirements as stipulated by the central bank.
• To meet sudden demand for funds arising out of large outflows (like advance tax payments).
• Call money market serves the role of equilibrating the short-term liquidity position of the banks

Function of Money Market

• It helps in quick transfer of funds
• To maintain the balance between the demand and supply for money when it comes to short-term money-related transactions (monetary equilibrium)
• To promote economic growth. The money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.
• To provide help to Trade and Industry. The money market provides adequate finance to trade and industry. Similarly, it also provides the facility of discounting bills of exchange for trade and industry.
• To help in implementing Monetary Policy. It provides a mechanism for the effective implementation of the monetary policy.
• To help in Capital Formation. The money market makes available investment avenues for the short term period. It helps in generating savings and investments in the economy.
• It provides various kind of credit instrument to augment the money supply.
• It helps to minimize the gluts (Over supply of Capital) and stringencies (Under supply of Capital) in money market due to seasonal variations in the flow of and demand of funds.
• (Glut is an excessive amount, as in the production of a crop, often leading to a fall in price. Supply more than demand. In Money market excess money with an organisation.
• Stringencies is shortage of money or shortage of supply of money. (A tight situation).

Stakeholders of Money Market

Unorganised Sector

• Moneylenders
• indigenous bankers
• Unregulated Non-Bank Financial Intermediaries (e.g. Finance companies, Chit funds, Nidhis);

Organized sector:

• Reserve Bank of India
• private banks
• public sector banks
• development banks
• Non-banking Financial Companies (NBFCs) such as Life Insurance Corporation of India (LIC), the International Finance Corporation, IDBI, and the co-operative sector.

Instruments of Money Market

• Call (overnight) money/Notice money.
• Government Security (Dated Security, Treasury Bills (T-Bills) & Cash Management Bill (CMBs))
• Commercial Paper.
• Commercial Bills.
• Certificate of Deposit.
• Banker Acceptance.
• Inter Bank Participation Certificate.
• Inter Corporate Certificates.
• Repo Operations.

Call Money Market

• If financial institutions including banks need immediate money, there are few arrangements for them to borrow for very small periods. Such loans are provided from the money market.

What is money market?

• According to the RBI, “the money market is a market for short-term financial assets that are close substitutes of money”.

Call money market

• The call money market (CMM) the market where overnight (one day) loans can be availed by banks to meet liquidity.
• Banks who seeks to avail liquidity approaches the call market as borrowers and the ones who have excess liquidity participate there as lenders.
• The CMM is functional from Monday to Friday. Banks can access CMM to meet their reserve requirements (CRR and SLR) or to cover a sudden shortfall in cash on any particular day.

Notice money market

• If the bank needs funds for more days, it can avail money through “short notice market” or notice money market. Here, the loan is provided from 2 days to 14 days.
• Term Money– Lending and borrowing of funds beyond 14 days.

Participants

• Participants in the call money market are banks and related entities specified by the RBI.
• Scheduled commercial banks (excluding RRBs),
• co-operative banks (other than Land Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice money market both as borrowers and lenders.
• As per the new regulations, Payment Banks are also allowed to participate in CMM as borrowers.

Government Security (G-Sec)

Dated Securities - G-Secs

(Maturity More than 1 Year)

• Dated G-Secs are also among the different types of government securities in India. Unlike T-bills and CMBs, G-Secs are long-term money market instruments that offer a wide range of tenures, starting from 5 years and going all the way up to 40 years.
• These instruments come with either a fixed or a floating interest rate, also known as the coupon rate. The coupon rate is applied on the face value of your investment and is paid to you on a half-yearly basis as interest.
• The Dated Securities of State Government are called as State Development Loans (SDLs)
• The central government issues both: treasury bills and bonds or dated securities.
• State governments issue only bonds or dated securities, which are called the state development loans.
• Further Read: https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79

Treasury Bills (T-Bills):

(Maturity less than 1 Year)

• Treasury Bills are one of the safest money market instruments as they are issued by Central Government.
• They are zero-risk instruments, and hence returns are not that attractive.
• T-Bills are circulated by both primary as well as the secondary markets.
• They come with the maturities of 3-month, 6-month and 1-year.
• The Central Government Issues T-Bills at a price less than their face value and the difference between the buy price and the maturity value is the interest earned by the buyer of the instrument.
• The buy value of the T-Bill is determined by the bidding process through auctions.
• At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day.

Cash management bills (CMBs)

(Maturity less than 90 days)

• CMBs are issued by the government of India in consultation with the Reserve Bank of India (RBI) to meet its short term cash requirements.
• The maturity period of these bills is less than 91 days

[State Government can issue only State Development Bond {Dated security} by RBI. State not have power to issue T-Bills & CMBs.

Upper limit for Bond release is fixed by Union Government]

Commercial Paper

(T-Bill of firms. Short term Bond Issued by Company, without any collateral is called as Commercial Bond).

• The RBI introduced a scheme of CP in January 1990.
• CP is a short term negotiable money market Instrument and is issued by companies in the form of a promissory note, redeemable at par to the holder on maturity.
• It is used by corporate houses in India.
• The CP issuing companies need to obtain a specified credit rating from a agency approved by the RBI.
• The period of CP is 15 days to 365 days from date of issue and is issued at a discount.
• These are issued for the purpose of financing of accounts receivables, inventories and meeting short term liabilities.
• The return on commercial papers is higher as compared to T-Bills so as the risk as they are less secure in comparison to these bills.
• It is easy to find buyers for the firms with high credit ratings.
• These securities are actively traded in secondary market.

Commercial Bills

Ex: Tata Motor buy 1000 tyre cost of 50 lakhs form MRF company at jan 2022, Tata Motors say give money at July 2022, both MRF & Tata Motor have Invoice. If MRF need of urgent need of money at March, So MRF give the invoice to SBI {SBI verify the buyer} buy the invoice at 49.5 lakhs. At July 2022 Tata Motors give money to SBI bank and get Invoice. It’s also called discounting bills of exchange for trade and industry.

• One ways the bank extend credit to their customer is by discounting their commercial bills.
• Such credit bill finance is repayable on maturity of the bill.
• The eligibility criteria prescribed by RBI for rediscounting a bill stipulates interalia that the bill should fall within 90 days from date of discounting.
• The bill discounting rate is dictated by the market force & there is less volatility in interest rate in this then call market.

Trade Receivable Discounting System (TReDS)

(Like as Commercial Bills, Any company has invoice register in TreDS, any person discounts the invoice and Buy it. TReDS act as Online Platform.)

It is an online platform for the purpose of facilitating the financing process of the trade receivables of Micro, Small and Medium Enterprises (MSMEs). This was launched owing to the fact that MSME’s suffer from the lack of payments for the goods and services they provide.

• All banks do not buy the invoice. So govt introduce the portal TReDS.
• TREDS is an electronic platform for facilitating the financing/discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
• It is a platform for uploading, accepting, discounting, trading and settling invoices / bills of MSMEs and facilitating both receivables as well as payables
• MSME sellers, corporate and other buyers, including Government Departments and PSUs, and financiers (banks, NBFC Factors and other financial institutions, as permitted) are direct participants in the TREDS and all transactions processed under this system are "without recourse" to MSMEs.

Repurchase Agreements (Repo operation).

(Bank buy money from RBI by giving G-Sec)

• Repurchase Agreements which are also called as Repo or Reverse Repo are short term loans that buyers and sellers agree upon for selling and repurchasing.
• Repo or Reverse Repo transactions can be done only between the parties approved by RBI and allowed only between RBI-approved securities such as state and central government securities, T-Bills, PSU bonds and corporate bonds.
• They are usually used for overnight borrowing.
• Repurchase agreements are sold by sellers with a promise of purchasing them back at a given price and on a given date in future.
• On the flip side, the buyer will also purchase the securities and other instruments with a promise of selling them back to the seller.
• Refer Monetary Policy Notes

Certificate of Deposit

(Similar to T-Bills. Bank release Certificate of Deposit, which maturity is less than 1 Year. Anyone buy the CD and give money to Bank. Interest higher than G-Sec).

• RBI introduced CD in 1989.
• CD is a negotiable instrument, issued at a discount and face value is payable at maturity by the issuing bank.
• The CD are short-term deposit instrument for a period ranging from three months to one year.
• The discount rate for the issue of CD are market driven.
• Certificate of Deposit is like a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest.
• It is similar to bank term deposit account. The certificate bears the maturity date, fixed rate of interest and the value.
• The returns on certificate of deposits are higher than T-Bills because they carry higher level of risk.
• The minimum amount issued through the certificate of deposit is rupees 1 lakh by a single user, and larger amounts are in the multiples of rupees 1 lakh.
• For banks, the minimum maturity period of the certificate of deposit should not be less than 7 days and maximum maturity period should not be more than 1 year. For Financial Institutions, the minimum maturity period should not be less than 1 year and the maximum maturity period should not be more than 3 years.

Banker's Acceptance

(Similar to Buyers Credits, Bank give assurance to Company/Person)

Ex: Tata Motor buy 1000 tyre cost of 50 lakhs form MRF company on Jan 2022 and say give on - - - July 2022. If MRF does not trust Tata motors pay on time.

- So Tata Motor has account in SBI bank, Tata ask SBI to give bankers acceptancy for him, SBI give bankers acceptancy (Like Credit Guarantee/ Buyers guarantee) based on Tata motors account performance or Civil Score or any parameter is used. Tata Motors give Bankers acceptancy to MRF, then MRF trust Tata Motors.

• Banker's Acceptance is like a short term investment plan created by non-financial firm, backed by a guarantee from the bank.
• It's like a bill of exchange stating a buyer's promise to pay to the seller a certain specified amount at a certain date.
• And, the bank guarantees that the buyer will pay the seller at a future date.
• Firm with strong credit rating can draw such bill.
• These securities come with the maturities between 30 and 180 days and the most common term for these instruments is 90 days.
• Companies use these negotiable time drafts to finance imports, exports and other trade

Inter-Bank Participation Certificates

- Similar to Repo operation, in repo operation Bank buy money from RBI by giving G-Sec. In Inter-Bank Participation Certificates bank buy money from other Bank by giving performing assert {Principle & Interest coming Regularly}

- Ex: IOB need 10 Cr, So IOB pledge 10 Cr value Performing assert to SBI and get Money in short term. Until IOB 10 Cr to SBI & get back the assert the principle & interest are goes to SBI (these is profit for SBI). They are two types

(Negotiation between the bank)

• Inter-Bank Participation Certificates or simply Participation Certificates (PC) are short-term papers issued by scheduled commercial banks to raise funds from other banks against big loan portfolios.
• When banks are short of liquidity to carry on their immediate operations and need short-term funds, they may approach other banks to share/participate in their lending portfolios.
• In other words, part of the specified loans and advances of the borrowing bank will be passed on to the lender-bank against cash.
• This will have the effect of reducing the exposure of borrower-bank on its particular loan portfolio and increase in the portfolio of lender-bank when the participation is without recourse basis.
• Borrower-banks can have access to the facility only, up to certain percentage (currently 40%) of their standard or performing assets, i.e., Loans and Advances which are being serviced without default.
• PCs can be issued only for a maximum period of 180 days and not less than a 90-day period.

IBPCs are of two types:

They are:

1. With risk sharing, (90 – 180 days) - Whole money (Principle & Interest) from assert go to SBI. SBI get 10 Cr from the assert (Like Selling the performing assert).
2. Without risk sharing, (90 days) - Only interest go to SBI until IOB give 10 Cr. (Like pledging assert)

Risk Sharing – If it became the Non performing assert. The Risk is born by lending bank.

Only Scheduled Commercial Banks can issue IBPCs.

Inter-Corporate Deposits

(Like IBPC, In IBPC transaction between bank to Bank. In Inter-Corporate Deposits transaction between Corporate to Corporate)

Mostly the Inter-Corporate Deposits done between parent, sister company (TCS from Tata motors)

• Inter-Corporate Deposits or ICD is another money market instrument for corporate to park their temporary surplus funds with other corporate.
• What a participation certificate for banks is an inter-corporate deposits between corporate.
• Under ICD, corporate lend temporary funds generally to their own group companies;
• Any corporate can issue the instrument without there being any prescription about minimum size of such lending and borrowings.
• This market is not well-regulated for want of adequate information.