Collateralized Borrowing and Lending Obligation (CBLO) is a negotiable instrument which is fully collateralized with no credit risk association

to it , as CCIL i.e., the issuing authority of CBLO provides guarantee against the default to counterparty. The party needs to have a SGL account with CCIL for lodgment of securities which are to be used as collateral for borrowing. There is a limit to which the funds can be borrowed and it is decided by CCIL. It was introduced by CCIL on 20th Jan, 2003, and has got immense popularity in the market. Earlier it was traded less in number but today the number crosses to 30000 million everyday. It has been one of the options for investors who are moving out of the call money market due to RBI restrictions. The first disadvantage of call market being it has unsecured lending and the RBI has decided to phase out non bank entities from call money market. It has imposed restriction on access to call money market by bank and primary dealers. Entities that are not forming a part of banking system are not allowed to participate in the Liquidity Adjustment Facility auctions conducted by RBI. Due to this market participants are forced to use the Repo market for deployment of their funds. A study by Golaka Nath (NSEIL) and R Natrrajan,CBLO and its impact on other Money Market Segments. states that Liquidity Adjustment Facility (a tool used in monetary policy that allows bank to borrow money through repurchase agreement) has a negative relationship with call ,and REPO, positive relation with CBLO.CBLO has various advantages like CRR exemption, , Lower risk weight etc. The most interesting thing about CBLO is that one can make a guess on the rate of interest and availability of money. For example consider the rate of CBLO as stated by CCIL is 2.9% and the current Reverse Repo Rate is 3.7%. So, banks to suffice liquidity crunch or to make profit borrow from the CBLO and sell it to RBI ; in this case the bank makes a profit of 0.8% profit .Thus CBLO proves out to be less riskier than providing retail loans which might prove out to be risky. Supporting the same a recent article published on 20th November 2010 mentions that the banks borrowed 1105.29 billon and parked 19.59 billion as a reverse repo; moreover huge amount was borrowed for IPO as well by MOIL Ltd. One of the reasons for CBLOs popularity can also be that it is more flexible when compared to Repos , where the obligation can be squared up only on a single due date, there is no option to prepay even if the borrower wants to; whereas, CBLO allows buy and sell anytime during the tenure.

Thus, we can say that CBLO an infant in the market one has shown a calibrated growth and integration when compared to other markets, and today stands as an important instrument for banks, and corporate in liquidity crunch or otherwise.