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INDEX

STRUCTURE OF INDIAN FINANCIAL SYSTEM MONEY MARKET IN INDIA MONEY MARKET INSTRUMENTS: CALL MONEY MARKET TREASURY BILLS COMMERCIAL PAPER CERTIFICATE OF DEPOSITS DISTINGUISH BETWEEN CP & CD INTER-BANK PARTICIPATION CERTIFICATES INTER-CORPORATE DEPOSITS COMMERCIAL BILL RECENT DEVELOPMENTS

MONEY MARKET INSTRUMENTS, MEASURING YIELD & IMPACT OF MONETARY POLICY


STRUCTURE OF INDIAN FINANCIAL SYSTEM
FINANCIAL MARKETS

CAPITAL MARKET

MONEY MARKET

PRIMARY

SECONDARY

ORGANIZED

UNORGANIZED

RBI COMMERCIAL BANKS DFHI DEVELOPMENT BANKS REGIONAL RURAL BANKS

NIDHIS CHIT FUNDS INDIGENEOUS BANKERS MONEY LENDERS FINANCE COS.

The Indian financial system is broadly classified into two categories namely Capital market and Money market. Capital market is the market for long term funds while Money market is the market for short term funds. Capital market is further classified into primary market and secondary market. Money market again has two divisions organized and unorganized money market. Under organized market the main players are Reserve Bank of India, Commercial banks, Discount and Finance house of India limited, Development banks and Regional Rural banks. The unorganized sector of the money market includes Nidhis, Chit funds, Indigenous bankers, Money lenders, Finance companies etc. Money market in India: Introduction The Indian money market is "a market for short-term & Long term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money." It is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, FRAs and IRS more recently. The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit. The money market fulfills the borrowing and investment requirements of providers and users of shortterm funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal point for the Central Bank's intervention in the market.

Features of Indian Money Market: Dichotomic Structure: It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganized money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously. Seasonality: The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities takes place leading to a higher demand for money. Multiplicity of Interest Rates: In Indian money market, we have many levels of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Again in both organized and unorganized segment the interest rate differs. Thus there is an existence of many rates of interest in the Indian money market. Lack of Organized Bill Market: In the Indian money market, the organized bill market is not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still there is no properly organized bill market in India. Absence of Integration: This is a very important feature of the Indian money market. At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market. RBI has full control over the components in the organized segment but it cannot control the components in the unorganized segment. High Volatility in Call Money Market: The call money market is a market for very short term money. Here money is demanded at the call rate. Basically the demand for call money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly volatile. Limited Instruments: It is in fact a defect of the Indian money market. In our money market the supply of various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers and lenders, It is necessary to develop numerous instruments. Drawbacks of Indian Money Market: Though the Indian money market is considered as the advanced money market among developing countries, it still suffers from many drawbacks or defects. These defects limit the efficiency of our market. Some of the important defects or drawbacks of Indian money market are:Absence of Integration: The Indian money market is broadly divided into the Organized and Unorganized Sectors. The former comprises the legal financial institutions backed by the RBI. The unorganized statement of it includes various institutions such as indigenous bankers, village money lenders, traders, etc. There is lack of proper integration between these two segments.

Multiple rate of interest: In the Indian money market, especially the banks, there exist too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors. Insufficient Funds or Resources: The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it. Shortage of Investment Instruments: In the Indian money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate. Shortage of Commercial Bill: In India, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form, the scope for commercial bills is limited. Lack of Organized Banking System: In India even though we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the NPA, huge losses, and poor efficiency. The absence of the organized banking system is major problem for Indian money market. Less number of Dealers: There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system. The less number of dealers leads to the slow contact between the end lender and end borrowers.

MONEY MARKET INSTRUMENTS CALL MONEY


The call money market refers to the market for extremely short period loans; say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus lend to other banks with deficit funds in the call money market. Thus, it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial bank can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile. Operations in Call Market Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-thetelephone market. After negotiations over the phone, the borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favor of the borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the lender the duly discharges receipt. Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India (DFHI), the borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal settlement advice is lender and receives RBI cheque for the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit receipt by the borrower.

Call loan market transitions and participants In India, call loans are given for the following purposes: To commercial banks to meet large payments, large remittances to maintain liquidity with the RBI and so on. To the stock brokers and speculators to deal in stock exchanges and bullion markets. To the bill market for meeting matures bills. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. To individuals of very high status for trade purposes to save interest on O.D or cash credit. Advantages of call money In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows: High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market. High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily. Maintenance of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon their profitability. Safe and Cheap: Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited from operating in the call market. Hence, banks need not pay brokers on call money transitions. Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully. Drawbacks of call money: The call market in India suffers from the following drawbacks: Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development. Lack of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration. Volatility in Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates vary to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates vary between 12% and 85%. One cannot believe 85% being charged on call loans.

Prudential Limits The prudential limits in respect of both outstanding borrowing and lending transactions in call/notice money market for scheduled commercial banks, co-operative banks and PDs are as follows:Table : Prudential Limits for Transactions in Call/Notice Money Market Sr. No. Participant 1 Scheduled Commercial Banks Borrowing On a fortnightly average basis, borrowing outstanding should not exceed 100 per cent of capital funds (i.e., sum of Tier I and Tier II capital) of latest audited balance sheet. However, banks are allowed to borrow a maximum of 125 per cent of their capital funds on any day, during a fortnight. Outstanding borrowings of State Cooperative Banks/District Central Cooperative Banks/ Urban Co-op. Banks in call/notice money market, on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year. PDs are allowed to borrow, on average in a reporting fortnight, up to 225 per cent of their net owned funds (NOF) as at endMarch of the previous financial year. Lending On a fortnightly average basis, lending outstanding should not exceed 25 per cent of their capital funds. However, banks are allowed to lend a maximum of 50 per cent of their capital funds on any day, during a fortnight. No Limit.

Co-operative Banks

PDs

PDs are allowed to lend in call/notice money market, on average in a reporting fortnight, up to 25 per cent of their NOF.

TREASURY BILLS
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. All T-bills are sold through an auction process, as per a fixed schedule announced by the Reserve Bank of India (RBI). T-bills are available for a minimum amount of Rs 25,000. These instruments are issued at a discount to the face value. On maturity of the T-Bill, the holder received the face value. PARTICIPANTS: Reserve bank of India,State bank of India,Commercial banks,State government ,DFHI,STCI,Financial institutions like LIC ,UTI ,NABARD etc. ,Corporate entities and public and FIIS. Advantages of T-bill: No default risk and transparent Extremely liquid Safe return Funds mobilization Type of T-bill periodicity Day of auction Day of payment 91-day weekly Every wednesday Following friday 182-day fortnightly Alternate wednesday Following friday 364-day Fortnightly Alternate Following friday Wednesday(with no 182-day T-bill auction)

RECENT UPDATES: In 2011, NSE introduced future contracts on 91-days Government of India (GOI) Treasury Bill. T-bill 29th August,2012 3rd september,2012 91 days 182 days 364 days 8.2159 % 8.1867% 8.0789% 8.1929 % 8.2036 % 8.0775 %

TREASURY BILL CALCULATION It is calculated as per the following formula

Wherein; PPurchaseprice DDaystomaturity Day Count: For Treasury Bills, D = [actual number of days to maturity/365] Illustration Assuming that the price of a 91 day Treasury bill at issue is Rs.98.20, the yield on the same would be

After say, 41 days, if the same Treasury bill is trading at a price of Rs. 99, the yield would then be

Note that the remaining maturity of the treasury bill is 50 days (91-41).

COMMERCIAL PAPER
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 364 days. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose. Requirement for issue of commercial paper Commercial paper can be issued by non-banking company desiring to raise funds for short periods from the market for meeting working capital requirement s. companies governed by FEMA can also issue commercial paper with the approval of government of inda. The following conditions should be satisfied by the company issuing commercial paper. The issuing company should have a tangible net worth of not less than Rs. 4 crore as per the latest balance sheet. The company should have working capital limit of not less than Rs.4 crore. The company should have minimum p2/A2 rating from CRISIL/ICRA/CARE any other credit rating agency for the purpose. The rating should not be more than two months old from the date of issue of commercial paper. The company should be listed on one of the recognized stock exchange. Who can invest in CP? Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time. Duration of commercial paper In India CPs can be issued for maturities between 15 days and one year with effect from may 25, 1998. Commercial paper rates fall below 9% on investor interest Companies choose the route due to rate advantage Parnika Sokhi / Mumbai Aug 17, 2012, 00:07 IST

The rates on commercial paper (CP) fell below nine per cent after about one-and-a-half years, as investors took advantage of interest differentials with other debt instruments such as certificates of deposit (CDs).

Companies other than non-banking finance ones, the usual issuers, were seen taking advantage of the investor demand. CP is a short-term debt instrument issued by companies to raise funds for up to a year. CDs are issued by banks for the same maturity. Mutual funds, banks and insurance companies are major investors in these instruments. According to market participants, Tata Motors raised Rs 100 crore at 8.8 per cent for three months, Marico issued November-dated CP at 8.8 per cent and IOC raised Rs 500 crore at 8.77 per cent for maturity up to November. CP rates had shot up to 12 per cent in March and have since been on a declining trend. However, a sharper fall in CD rates recently has led to shift in investor interest from CDs to CP. There was demand for CDs when they were being issued at nine to 10 per cent. Then, CP were not preferred much, said K P Jeevan, head-fixed income at Karvy Stock Broking. Rates on CDs have fallen 50 basis points over the past month, due to lack of issuances from banks. A recent advisory from the finance ministry asked public sector banks to limit their bulk deposits to 15 per cent of total deposits. Also, banks realigned the rates on CDs to their card rates, to minimize the interest rate differential. Banks that are not borrowing but have surplus funds are also investing in CP, said Ajay Manglunia, senior vice-president, Edelweiss Securities. Companies prefer to raise funds via CP over bank loans, as rates in the money market are lower than most banks base rates, he said. The amount of CP issuances has gone up with softening of rates. Bank investment in CP rose to Rs 21,550 crore as on July 27, from Rs 13,350 crore a year before, according to data from the Reserve Bank of India. State Bank of India Chairman Pratip Chaudhuri recently said the banks credit growth expectation included investments in CP. The central bank is looking at including the amount raised via CP to calculate credit growth in the economy, he added. Rates are expected to stay around these levels for another month before advance tax outflows create liquidity pressure in mid-September. Presently, the liquidity deficit in the banking system is well within the central banks comfort zone, of one per cent of net demand and time liabilities. Pros & Cons of Commercial Paper: Benefits: No security is required. Interest rate is typically less than that required by banks or finance companies. Commercial paper dealer often offers financial advice. It is a simple instrument. Very less documentation between the issuer and the investor. It is flexible in terms of maturities of the underlying promissory note. It can be tailored to match the cash flow of the issuer. A good credit rated company can diversify its sources of finance from banks to the short-term money market at a cheaper cost. For the investors, higher returns obtained than if they invest their funds in any bank. For the companies, they are better known to the financial world and hence placed in a better position to borrow long-term funds in future. There is no limitation on the end-use of funds raised through commercial papers. They are highly liquid.

Drawbacks: It can only be issued by large financially sound companies. The dealings of commercial paper are impersonal.

CERTIFICATE OF DEPOSITS
Introduction CDs are negotiable money market instrument issued in demat form or as a Usance Promissory Notes. CDs normally give a higher return than Bank term deposit. CDs are rated by approved rating agencies (e.g. CARE, ICRA, CRISIL, and FITCH) which considerably enhance their tradability in the secondary market, depending upon demand. SBI DFHI is an active player in secondary market of CDs. It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods. However, if interest is paid more than once in a year, it is beneficial to opt APY over APR. Eligibility CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise shortterm resources within the umbrella limit fixed by RBI. Minimum Size of Issue and Denominations Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. Investors CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market. Maturity The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. Discount / Coupon Rate CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank / FI is free to determine the discount / coupon rate. Reserve Requirements Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.

Transferability CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs. Trades in CDs All OTC trades in CDs shall be reported within 15 minutes of the trade on the FIMMDA reporting platform. Loans / Buy-backs Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification. Security Aspect Since CDs in physical form are freely transferable by endorsement and delivery, it will be necessary for banks/FIs to see that the certificates are printed on good quality security paper and necessary precautions are taken to guard against tampering with the document. They should be signed by two or more authorized signatories. Payment of Certificate Since CDs are transferable, the physical certificates may be presented for payment by the last holder. The question of liability on account of any defect in the chain of endorsements may arise. It is, therefore, desirable that banks take necessary precautions and make payment only by a crossed cheque. Those who deal in these CDs may also be suitably cautioned. The holders of dematted CDs will approach their respective depository participants (DPs) and give transfer / delivery instructions to transfer the security represented by the specific International Securities Identification Number (ISIN) to the 'CD Redemption Account' maintained by the issuer. Upon receipt of the demat credit of CDs in the "CD Redemption Account", the issuer, on maturity date, would arrange to repay to holders / transferors by way of Banker's cheque / high value cheque, etc. Features of CD All scheduled banks (except RRBs and Co-operative banks) are eligible to issue CDs. They can be issued to individuals, corporations, trusts, funds and associations. NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondary market such CDs cannot be endorsed to another NRI. They are issued at a discount rate freely determined by the issuer and the market/investors. CDs issued in physical form are freely transferable by endorsement and delivery. Procedure of transfer of demated CDs is similar to that of any other demat securities. For CDs there is no lock-in period. Discount/Coupon rate of CD is determined by the issuing bank/FI. Loans cannot be granted against CDs and Banks/FIs cannot buy back their own CDs before maturity.SBI DFHI Limited, participates in both the Primary and Secondary Market for CDs. Investors can buy CDs through SBI DFHI Invest Plus scheme of SBI DFHI Ltd. Measures Yield on certificate of deposits Certificate of deposits issued at discount to face value. The discount is offered either front end discount, the effective rate of discount is higher than the quoted rate, while in case of rear end discount, the CDs on maturity yield the quoted rate. This can be explained as under:

Certificate of deposits issued at discount Amount of issue Rs. 100 Period 6 months Rate of discount 20% Discount = 100 x 20 x 6 = Rs.10 100 12 CDs will be issued for Rs.100 Rs.10 = Rs.90 The effective rate to the bank will, however, be calculated on the basis of the following formula: E = FV SV/ SV * Month in a year / M *100 Wherein, E = Effective yield FV = Face value SV = Sale value M = period of discount Accordingly the yield as per the data given in the example will be: E = 100 90 x 12 x 100 = 22.226% 90 6

Difference between commercial paper and certificate of deposit


A certificate of deposit (CD) is a document issued by the bank to an investor who chooses to deposit his funds in the bank for a specific amount of time. Once the money has been deposited the depositor cannot withdraw the funds before maturity without incurring a penalty for early withdrawal. Commercial paper is used a substitute for a bank loan The main difference between the two forms of instruments is the time period of maturity of the two. While a CD is usually for a longer term, Commercial paper is for a shorter period. Maturity - not be less than 7 days and not more than one year. The FIs maturity period is not less than 1 year and not exceeding 3 years. Commercial paper is matures within a period of 270 days. The purpose of certificate of deposit (CD) is to profit from the interest rate fluctuations. The purpose of commercial paper is to raise funds by corporate. CDs are issued as a proof of an investment of funds in the bank by a depositor. Commercial papers are issued to an investor as a proof of purchase of the issuers debt

Inter Bank Participation Certificate


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.

The Inter Bank Participation Certificates are short term instruments to even out the short term liquidity within the Banking system particularly when there are imbalances affecting the maturity mix of assets in Banking Book. The primary objective is to provide some degree of flexibility in the credit portfolio of banks. It can be issued by schedule commercial bank and can be subscribed by any commercial bank. The IBPC is issued against an underlying advance, classified standard and the aggregate amount of participation in any account time issue. During the currency of the participation, the aggregate amount of participation should be covered by the outstanding balance in account. There are two types of participation certificates, with risk to the lender and without risk to the lender. Under with risk participation, the issuing bank will reduce the amount of participation from the advances outstanding and participating bank will show the participation as part of its advances. Banks are permitted to issue IBPC under with risk nomenclature classified under Health Code-I status and the aggregate amount of such participation in any account should not exceed 40% of outstanding amount at the time of issue. The interest rate on IBPC is freely determined in the market. The certificates are neither transferable nor prematurely redeemable by the issuing bank. Under without risk participation, the issuing bank will show the participation as borrowing from banks and participating bank will show it as advances to bank. The scheme is beneficial both to the issuing and participating banks. The issuing bank can secure funds against advances without actually diluting its asset-mix. A bank having the highest loans to total asset ratio and liquidity bind can square the situation by issuing IBPCs. To the lender, it provides an opportunity to deploy the short-term surplus funds in a secured and profitable manner. The IBPC with risk can also be used for capital adequacy management. This is simple system as compared to consortium tie up. Scheme of Inter Bank Participations- RBI Guidelines issued on December 31, 1988 There will be two types of Participations: I. Inter-Bank Participations with Risk Sharing II Inter-Bank Participations without Risk Sharing. The Participations would be strictly interbank confined to scheduled commercial banks. I. Inter-Bank Participations with Risk sharing The primary objective of the Participations is to provide some degree of flexibility in the credit portfolio of banks and to smoothen the working of consortium arrangements. 1. Applicability of the Scheme: The scheme will be confined to scheduled commercial banks. 2. Period of Participations: The minimum period of such Participation will be 91 days, while the maximum period will be 180 days. 3. Rate of Interest: The rate of interest on Participations would be left free to be determined between the issuing bank and the participating bank, subject to a minimum of 14.0 per cent per annum. 4. Selection of Accounts: Banks will allot such Participations only in respect of advances classified under Health Code No. 1 status. The aggregate amount of such Participations in any account should not exceed 40 per cent of the out standings in the account at the time of issue. During the currency of the Participations the aggregate amount of Participations should be covered by the outstanding balance in the account. In case the outstanding balance falls short of the participations outstanding, the issuing bank will reduce the Participations to the extent necessary and if need be, issue Participations for smaller amounts. Participations will not be transferable.

II. Inter-Bank Participations without risk sharing The primary objective of this type of Participation is to even out short term liquidity. The Participation should be backed by the cash credit accounts of the borrowers. 1. Applicability of the scheme: The scheme will be confined to scheduled commercial banks only. 2. Period of Participation: The tenure of such Participations will not exceed 90 days. 3. Rate of Interest: The rate of interest would be determined by the two concerned banks subject to a ceiling of 12.5 per cent per annum. Participation will not be transferable.

INTER CORPORATE DEPOSITS (ICDS)


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; otherwise the credit risk will be higher. 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. The RBI has not prescribed any norms for raising of resources through ICDs by the FIs. However, the FIs which are structured as companies under the Companies Act 1956, are eligible to issue ICDs as permissible under the Act. The amount of resources raised through ICDs should be within the overall umbrella limit fixed by the RBI. Thus, the issue of ICDs together with other instruments viz. term money, term deposits, CDs and CPs should not exceed 100 per cent of its net owned funds as per the latest audited balance sheet.

COMMERCIAL BILL
The market for buying and selling of commercial bills of exchange is known as a Commercial Bill Market. Commercial bill market is a market for Bills of Exchange arising out of genuine trade transactions. In the case of credit sale, the seller draws a bill of exchange on the buyer and once the buyer accepts this bill, the seller can discount it with a Bank and receive cash. Commercial bills are generally associated with business lending or high-end investment lending. They provide an injection of cash for borrowers who need more than $100,000. These types of loans are generally rolled over until the borrower has the funds to repay the loan amount in full. Eligible institutions:All scheduled commercial banks, selected urban co-operative banks; there were 21 other institutions such as Export Import Bank of India, LIC Mutual fund etc which became eligible to rediscount bills under this scheme. How do commercial bills work? A commercial bill assists you to raise the finance you need for investment purposes through negotiable bank bills. The interest rate, or floor rate, is based on two things, the Bank Bill Swap Rate (BBSW), and a margin added by the lender of 1.00-3.00% called the facility fee. This margin can vary significantly between lenders, depending on a combination of factors including the financial strength of the borrower, the underlying security, competitive pressures etc.

Features of Commercial Bill Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit to their customers by discounting commercial bills. This credit is repayable on maturity of the bill. Commercial bills ensure improved quality of lending, liquidity and efficiency in money management. It is fully secured for investment since it is transferable by endorsement and delivery and it has high degree of liquidity. MEASURING YIELD of Commercial Bill Face value = Rs. 100/Rate of Discount = @ 15 % Period = 2 Months First we can calculate discount rate 100 x 15 x 2 100 100 = Rs. 2.50 Sale Value = Face value Discount 100 - 2.50 = Rs. 97.50

Yield Calculation Y= FV - SV x days or months in s year SV M Where in Y= Yield FV= Face value SV= Sale Value M = Period of Discount Y= 100 97.50 x 12 x 100 97.50 2 = 15.385 %

x 100

RECENT DEVELOPMENTS
COLLATERAL BORROWING AND LENDING OPERATION CBLO Is an RBI approved Money Market instrument; Is an instrument backed by Gilts as Collaterals Creates an Obligation on the borrower to repay the money borrowed along with interest on a predetermined future date A Right and Authority to the lender to receive money lent along with interest on a predetermined future date; Creates a charge on the Collaterals deposited by the Borrower with CCIL for the purpose CBLO Members are Nationalized Banks, Private Banks, Foreign Banks, Co-operative Bank, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc. Becoming Members to CBLO segment submit applications to CCIL and CCDS seperately along with two cheques of Rs 25000/- each favoring The Clearing Corporation of India Limited and ClearCorp Dealing Systems (India) Limited, towards one time membership fee. CBLO instruments with maturity dates of next seven business days and immediate three month end dates are generally made available for settlement type T+0 and T+1.

Two types of markets available to CBLO Dealing System Members are CBLO Normal market and the CBLO Auction market. The minimum and multiple lot size for CBLO Normal market is Rs.5 lakhs. The minimum lot size for CBLO Auction market is Rs.50 lakhs and multiple lot size is Rs.5 lakhs.

MONEY MARKET MUTUAL FUNDS Money market mutual funds invest money in specifically, high-quality and very short maturity-based money market instruments. The RBI has approved the establishment of very few such funds in India. In 1997, only one MMMF was in operation, and that too with very small amount of capital. Limits in MMMFs investments Treasury bills and govt. securities have an unexpired maturity of 1 year- 25%. Call/notice money- 30% Commercial paper 15% Commercial bills 20% Certificate of deposit no limit

BIBLIOGRAPHY
www.rbi.org.in www.wikipedia.com in.reuters.com http://economictimes.indiatimes.com http://www.egyankosh.ac.in/bitstream/123456789/25896/1/Unit7.pdf http://stcipd.com/callnotice.aspx Financial markets & Institutions : Guruswamy Financial markets & Institutions : Bhole