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Indian Money Market: Structure, Functions and Weaknesses

There are two kinds of markets where borrowing and lending of money takes place between fund scarce and fund surplus
individuals and groups. The markets catering the need of short term funds are called Money Markets while the markets that cater to
the need of long term funds are called Capital Markets. Thus, money markets is that segment of financial markets where borrowing
and lending of the short-term funds takes place.

The maturity of the money market instruments is one day to one year. In our country, Money Markets are regulated by both RBI
and SEBI. Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market
mainly made of indigenous bankers, money lenders etc. Organized market is that part which comes under the regulatory purview of
RBI and SEBI. The nature of the money market transactions is such that they are large in amount and high in volume. Thus, the
entire market is dominated by small number of large players. At the same time, the money market in India is yet underdeveloped.
The key players in the organized money market include Governments (Central and State), Discount and Finance House of India
(DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and
Financial Institutions and Non-Banking Financial Companies (NBFCs).

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has
seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ
money market instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding in the past 20 years. Central bank of the country -
the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The
intervention of RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the
economy.

The Indian money market cannot be considered as an integrated unit. It can be broadly divided into two different parts, i.e., the
unorganised and organised segments. There are lot of differences between unorganised and organised segment of Indian money
market. While the unorganised sector is constituted by money lenders and the indigenous bankers but the organised sector is again
constituted by the nationalised and private sector commercial banks, the foreign banks, co-operative banks and the Reserve Bank of
India (RBI). The unorganised segment of the Indian money market is not a homogenous and integrated sector but the organised
sector of the Indian money market is a fairly integrated one.

Unorganised segment of the Indian money market is composed of unregulated non-bank financial intermediaries, indigenous
bankers and money lenders which exist even in the small towns and big cities. Their lending activities are mostly restricted to small
towns and villages. The persons who normally borrow from this unorganised sector include farmers, artisans small traders and small
scale producers who do not have any access to modern banks.

The following are some of the constituents of unorganised money market in India.
(i) Indigenous Bankers:
Indigenous bankers include those individuals and private firms which are engaged in receiving deposits and giving loans and
thereby acting like a mini bank. Their activities are not at all regulated. During the ancient and medieval periods, these indigenous
bankers were very active. But with the growth of modern banking, particularly after the advent of British, the business of the
indigenous bankers received a setback.
Moreover, with the growth of commercial banks and co-operative banks the area of operations of indigenous bankers has again
contracted further. Even today, a few thousands of indigenous bankers are still operating in the western and southern parts of the
country and engaging themselves in the traditional banking business.

Indigenous bankers are classified into four main sub groups, i.e., Gujarati Shroffs, Multani-or Shikarpuri Shroffs, Chettiars and
Marwari, Kayast. Gujarati Shroffs are mostly operating in Mumbai, Kolkata and in industrial and trading cities of Gujarat. The
Multani or Shikarpuri Shroffs are operating mainly in Mumbai and Chennai. The Chettiars are mostly found in the South.The
Marwari Shroffs are mostly active in Mumbai, Kolkata, tea gardens of Assam and also in different other parts of North-East India.
Among the four aforesaid groups, the Gujarati indigenous bankers are considered as the most powerful groups in respect of its
volume of business.The indigenous bankers are mostly engaged in both banking and non-banking business which they do not want
to separate. Their lending operations remain mostly unregulated and unsupervised. They charge high rate of interest and they are not
influenced by bank rate policy of the Reserve Bank of India.

(ii) Unregulated Non-Bank Financial Intermediaries:


There are different types of unregulated non-bank financial intermediaries in India. They are mostly constituted by loan or finance
companies, chit funds and ‘nidhis’. A good number of finance companies in India are engaged in collecting substantial amount of
funds in the form of deposits, borrowings and other receipts.They normally give loans to wholesale traders, relailers, artisans, and
different self-employed persons at a high rate of interest ranging between 36 to 48 per cent.There are various types of chit funds in
India. They are doing business in almost all the states but the major portion of their business is concentrated in Tamil Nadu and
Kerala. Moreover, there are ‘nidhis’ operating in South India which are a kind of mutual benefit funds restricted to its members.

(iii) Moneylenders:
Moneylenders are advancing loans to small borrowers like marginal and small farmers, agricultural labourers, artisans, factory and
mine workers, low paid staffs, small traders etc. at very high rates of interest and also adopt various malpractices for manipulating
loan records of these poor borrowers.

There are broadly three types of moneylenders:


(i) Professional moneylenders dealing solely with money lending;

(ii) Itinerant moneylenders such as Kabulis and Pathans and

(iii) Non-professional moneylenders.

The area of operation of the moneylenders is very much localised and their methods of operation is also not uniform. The money
lending operation of the moneylenders is totally unregulated and unsupervised which leads to worst exploitation of the small
borrowers.Moneylenders have become a necessary evil in the absence of sufficient institutional sources of credit to the poorer
sections of society. Although various measures have been introduced to control the activities of moneylenders but due to lack of
political will, these are not enforced, leading to a exploitation of small borrowers.

Organised Sector of Indian Money Market:


The organised segments of the Indian money market is composed of the Reserve Bank of India (RBI), the State Bank of India,
Commercial banks, Co-operative banks, foreign banks, finance corporations and the Discount or Finance House of India Limited.
The segment of Indian money market is quite integrated and well organised.

Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmedabad are the leading centres of the organised sectors of the Indian money
market. The Mumbai money market is a well organised, having head offices of the RBI and different commercial banks, two
leading well developed stock exchanges, the bullion exchange and fairly organised market for Government securities. All these have
placed the Mumbai money market at par with New York money market of USA and London money market of England.

Commercial Banks
Commercial banks are a significant part of India’s Financial Institution system. These are profit earning institutions which accept
deposits from general public, and provide loans to individuals like household, entrepreneurs, businessmen etc. for various purposes.
There are total 93 Commercial banks in India. 27 Public sector banks, out of which 19 are nationalized and 6 are SBI and its
associates and rest two are IDBI and Bhartiya Mahila Bank and 21 Private Sector banks.
Commercial banks earn profit in the form of interest; commission etc. the main source of income of a commercial bank is the
difference between the lending rates and the deposit rate. Operations of all these banks are regulated by the Reserve Bank of Indi
(RBI).
Classification of commercial banks

1.Scheduled Banks

Scheduled banks are those banks which are included in the Second Schedule of RBI Act 1934. These banks carry out normal
business of banking like accepting deposits, providing loans and other banking services. All commercial banks (Indian and foreign),
regional rural banks and state co-operative banks are scheduled banks.
Catagorisation of Scheduled banks
 Public Sector Banks – Public sector banks are those banks in which The Government holds the majority of stake. For example-
SBI, PNB, Central bank of India, IDBI Bank Etc.
 Private sector Banks – Private sector banks are those banks in which private individuals hold the majority stake. For Example-
ICICI Bank, HDFC Bank, Yes Bank etc.
 Foreign Banks – Foreign banks are such banks, those have their Head office located outside India. For example – Citi Bank,
Standard Chartered bank etc.
 Regional Rural Banks – The Regional Rural Banks (RRBs), it is a new form of banks. These banks introduced in the middle of
1970s. They originated with the objective of developing rural economy by providing financial services in these remote areas. Each
RRB is owned by three entities with their respective shares as following –
Central Government – 50%
State Government – 15%
Sponsor Bank – 35%

Regional Rural Banks are regulated by NABARD (National Bank for Agriculture & Rural Development).
 Cooperative Banks – These banks are small financial Institutions. The structure of Indian Cooperative banks is one of the largest
networks across the world. These banks provide easy credit to small businesses and to the poor segment.
Structure of Cooperative network in India
The network of Cooperative banks can be divided into 2 broad segments as following

1. Urban Cooperative Banks


2. Rural Cooperative banks
Urban Cooperative Banks
In Indian Banking system urban cooperative banks are divided into scheduled and non-scheduled. Both categories are further
divided into single-state and multi-state. Major Banks are in the category of non-schedule and single-state.
 Operations of urban cooperative Banks are monitored by RBI.
 Registration and Management activities are managed by Registrar of Cooperative Societies (RCS).
 RCS operate in single-state and Central RCS (CRCS) operate in multi-state.
Rural Cooperatives
The structure of rural cooperatives is divided into short-term and long-term. The short-term cooperative banks are three tiered, they
operate in different states. These are as following –
1. State Cooperative Banks – these banks operate at the highest level in the state.
2. District Central Cooperative Banks – these banks operate at the district levels.
3. Primary Agricultural Credit Societies – these banks operate at the village or grass-root level.
In the same way long-term structures are divided as following –

1. State Cooperative Agriculture and Rural Development Banks (SCARDB) – these banks operate at state level.
2. Primary Cooperative Agriculture and Rural Development Banks (PCARDBS) – these banks operate at district / block level.
The activities of Rural Cooperative Banks are regulated by a shared management – RBI and NBARD. And all management and
registration activities are manages by RCS
2. Non-Scheduled Bank
These banks are not included in the Second Schedule of RBI Act 1934.

The main constituents of the organised sector of Indian money market include:
(i) The Call Money Market,

(ii) The Treasury Bill Market,

(iii) The Commercial Bill Market,

(iv) The Certificates of Deposits Market,

(v) Money Market for Mutual Funds and

(vi) The Commercial Paper Market.

(i) Call Money Market:


The call money market is a most common form of developed money market. It is a most sensitive segment of the financial system
which reflects clearly any change in it. The call money market in India is very much centred at Mumbai, Chennai and Kolkata and
out of which the Mumbai is the most important one. In such market, lending and borrowing operations are carried out for one day.

The call money market in also termed as inter-bank call money market. Normally, scheduled commercial banks, Cooperative banks
and the Discount and Finance House of India (DFHI) operate in this market and in a special situation; the LIC, UTI, the GIC, the
IDBI and the NABARD are permitted to operate as lenders in this call money market. In this market, brokers usually play an
important role.

(ii) Treasury Bill Market:


Treasury bill markets are markets for treasury bills. In India such treasury bills are short term liability of the Central Government
which are of 91 day and 364 day duration. Normally, the treasury bills should be issued so as to meet temporary revenue deficit over
expenditure of a Government at some point of time. But, in India, the treasury bills are, nowadays, considered as a permanent source
of funds for the Central Government.

In India, the RBI is the major holder of the treasury bills, which is around 90 per cent of the total. In India, ad-hoc treasury bills
have now been replaced by ways and means Advances since April 1, 1997, so as to finance temporary deficits of the Central
Government.

(iii) Commercial Bill Market:


The Commercial bill market is a kind of sub-market which normally deals with trade bills or the commercial bills. It is a kind of bill
which is normally drawn by one merchant firm on the other and they arise out of commercial transactions. The purpose for issuing a
commercial bill is simply to reimburse the seller as and when the buyer delays payment. But, in India, the commercial bill market is
not so developed. This is mainly due to popularity of the cash credit system in bank lending and the unwillingness on the part of
large buyer to bind himself to payment schedule related to the commercial bill and also the lack of uniform approach in drawing
bills.Commercial bills are an instrument of credit which is very much useful to business firms and banks. In India, the outstanding
amount of commercial bills rediscounted by the banks with different financial institutions at the end of March, 1996 was to the
extent of only Rs 374 crore.

(iv) Certificate of Deposit (CD) Market:


The certificate of Deposit (CD) was introduced in India by the RBI in March 1989 with the sole objective of widening the range of
money market instruments and also to attain higher flexibility in the development of short term surplus funds for the investors.
Initially the CDs are issued by scheduled commercial banks in multiples of Rs 25 lakh and also to the extent of a minimum of Rs 1
crore. Maturity period of CDs varied between three months and one year. In India, six financial institutions, viz., IDBI, ICICI, IFCI,
IRBI, SIDBI and Export and Import Bank of India were permitted in 1993 to issue CDs for period varying between 1 to 3 years.
Banks normally pay high rates of interest on CDs. In 1995-96, the stringent conditions in the money market induced the bankers to
mobilise a good amount of resources through CDs. Accordingly in recent years, the outstanding amount of CDs issued by the
commercial banks has almost been doubled from Rs 8,017 crore in March, 1995 to Rs 16,316 crore as on 29th March, 1996.

(v) Commercial Paper Market:


In India, the Commercial Paper (CP) was introduced in the money market in January 1990. A listed company having working
capital not less than Rs 5 crore can issue CP. Again the CP can be issued in multiples of Rs 25 lakhs subject to a minimum of Rs 1
crore for a maturity period varying between three to six months. CPs would be again freely transferable by endorsement and
delivery.

(vi) Money Market Mutual Funds:


In India, the RBI has introduced a scheme of Money Market Mutual Funds (MMMFs) in April 1992. The main objective of this
scheme was to arrange an additional short term avenue for the individual investors. This scheme has failed to receive much response
as the initial guidelines were not attractive. Thus, in November, 1995, the RBI introduced some relaxations in order to make the
scheme more attractive and flexible.

As per the existing guidelines, the banks, public financial institutions and the private financial institutions are allowed to set up
MMMFs. In the mean time, the limits of investment in individual instruments by MMMF have already been deregulated. Since
April 1996, the RBI has allowed MMMFs to issue units to corporate enterprises and others at par with the mutual funds introduced
earlier.

Weaknesses of Indian Money Market

(i) Lack of Adequate Integration:


There is lack of adequate integration in the Indian money market. The organised and the unorganised sector of Indian money market
are totally separate from each other and they have independent financial operations of their own. Therefore, activities of one sector
have no impact on the activities of the other sector. It is very difficult to establish a national money market under such a
background.

However, the Mumbai money market has been emerging as a strong money market in recent times. Moreover, various constituents
of the Indian money market viz., commercial banks, Co-operative banks and foreign banks are competing among themselves and
particularly, the competition is much in the countryside. Even the commercial banks are competing among themselves. Again, the
monetary policy of the RBI is also not effective to maintain adequate integration among various constituents of Indian money
market.
(ii) Shortage of Funds:
Another important feature of Indian money market is the shortage of funds. Therefore, the demand for loanable funds in the money
market is much higher than that of its supply.

This shortage of fund is mostly resulted from:


(i) Small capacity to save arising out of low per capita income;

(ii) Inadequate banking network and poor banking habit of the people, in general;

(iii) Absence of adequate and diversified investment opportunities and finally, the emergence of strong parallel economy having a
huge magnitude of black money.

In recent years, the development of rural banking structure, with the opening rural branches of commercial banks and with the
expansion of Co-operative banks, has improved the fund position of the Indian money market, to some extent.

(iii) Lack of Adequate Banking Facilities:


Indian money market is also characterised by lack of adequate banking facilities. Rural banking network in the country is still
inadequate. Population per bank office in India was 12,000 persons in 1993 as compared to that of only 1,400 persons in USA. In
the rural areas, a substantial number of population, having small saving potential, have no access to facilities.

Under such a system, a huge amount of small savings are not mobilised which needs to be mobilised for its productive uses through
the expansion of banking network.

(iv) Lack of Rational Interest Rate Structure:


There is lack of rational interest structure which is mostly resulted from lack of co-ordination among different banking institutions.
Recently, there is some improvement in this regard, particularly after the introduction of standardisation of interest rates by the RBI
for its rationalisation.

However, the present system of administered interest rates is suffering from the defects like:
(i) Too many concessional rates of interest;

(ii) Comparatively low yield on government securities, and

(iii) Improper lending and deposit rates fixed by the commercial banks.

(v) Absence of Organised Bill Market:


There is absence of organised bill market in India although the commercial banks purchase and discount both inland and foreign
bills to a limited extent. Although, the RBI has introduced its limited bill market under its scheme of 1952 and 1970, but the same
scheme has failed to popularize the bill finance in India.

The popularity of the cash credit system and lack of uniformity in commercial bills are mostly responsible for the poor development
of bill market in the country. Even after the introduction of Bill Market Scheme, 1970, the bill finance has declined and its extent
been declined from 20.3 per cent in 1971 to a mere 11.0 per cent in 1995-96.

(vi) Existence of Unorganised Money Market:


Another important feature of Indian money market is the existence of its unorganised character, where one of its segments is
constituted by the indigenous bankers and moneylenders. This unorganised segment in completely separated from the organised
segment of the money market.

Although the RBI has tried to bring the indigenous bankers under its direct control yet all the attempts have failed. Thus, as the
indigenous bankers remained outside the organised money market, therefore, RBI’s control over the money market is quite limited.

(vii) Seasonal Stringency of Money and Fluctuations in Interest Rates:


Another important feature of Indian money market is seasonal stringency of money and the volatile fluctuation of interest rates.
India, being an agricultural country has to face huge demand for funds during the period of October to June every year so as to meet
its requirement for farm operations and also for trading in agricultural produce.

But the money market is not having sufficient elasticity thus it creates seasonal stringency of funds leading to a rise in the rate of
interest. But in the rainy and slack season the demand for fund slumps down leading to a automatic fall in the rate of interest. Such
regular fluctuations in interest rates are not at all conducive to developmental activities of the country.

Considering various defects of Indian money market it can be observed that the money market in India is relatively underdeveloped.
Moreover, in respect of resources, organisation stability and elasticity, the said market cannot be compared with the developed
money markets of London and New York. But among the third world countries India has been maintaining the most developed
banking system. Even then the organisation of the money market is still underdeveloped.

The underdevelopment nature of Indian money market is mostly determined by the following shortcomings:
Firstly, Indian money market fails to possess an adequate and continuous supply of short term assets such as treasury bills, bills of
exchange, short term Government bonds etc.

Secondly, this market is lacking the highly organised banking system, so important for the successful working of a money market.

Thirdly, the sub-markets like acceptance market and the commercial bill market are non-existent in Indian money market.

Fourthly, Indian money market has totally failed to develop market for short term assets and accordingly there are no dealers of
short term assets who act as intermediaries between the Government and the entire banking system.

Fifthly, Indian money market in suffering from lack of co-ordination between its different constituents.

Sixthly, Indian money market again fails to attract any foreign funds.

Finally, Indian money market cannot be termed as a developed one considering its supply of fund and the liquidity position.

Functions of Money Market:

1. To maintain monetary balance between demand and supply of short term monetary transactions.

2. Money market plays a very important role of making funds available to many units or entities engaged in diversified field of
activities be it agriculture, industry, trade, commerce or any other business.

3. By providing funds to developing sectors it helps in growth of economy also.

4. Another important feature that money market provides is discounting of bills of exchange which facilitates growth of trade.

5. No doubt it provides a base for the implementation of monetary policy also.

6. The money market provides opportunity for short term investments, which provide for short term savings, which in turn help
formation of capital base also.

Money market provides quick liquidity for short term to meet the urgent and immediate obligations. Main and basic need remains
with Industrial Houses to meet their working capital requirements of short periods. If this period is long enough it may increase the
cost of funds. It is therefore always ensured that their remains a reasonable balance between acquiring liquidity and the earning
profitability. The main object of any industrial or business house remains to earn the maximum profitability.

If the quick liquidity for a short period raised from money market fulfils this objective it serves the purpose for which the money
market creates a bridge to overcome the gap of deficit and surplus cash flow. Since the transactions in money market are for high
value, these are most for a short period, the cost funds remain high if compared with earning of interest. The transactions in money
market are done through different type of instruments. It provides an easy mechanism to transfer of short term funds required for a
short period between two parties One in need of funds and the second having surplus funds. They are called borrowers and holders
of funds or cash assets (cash assets are money market instruments).For the lenders it provides a good opportunity of lending their
surplus funds on an agreed rate of interest with good returns in a short period. For the Borrowers it is an easy way to get cash money
relatively on less expensive rates to meet their short term liabilities. Money market is subject to volatile rate of interest depending on
supply and demand of money. But it also provides a focal point for the controlling authority i.e., RBI to ensure liquidity as well as
general rate of interest for the sustained economy. RBI ensures that the liquidity and the short term interest rates are consistent with
the monetary policy. The object of monetary policy is to attain overall economic growth.

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