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CHAPTER I Introduction to Banks

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Bank
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities. Banks are a fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow). Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current sets of global standards are called Basel II. The most recent trend has been the advance of universal banks, which attempt to offer their customers the full spectrum of financial services under the one roof. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.

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The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Jewish Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in times ancient, which indicates that the word 'bank' might not necessarily come from the word 'banco'.

Banking in India
Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a

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combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-

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related economic activities. At least 94 banks in India failed between 1913 and 1918.

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

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However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969.

Nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of

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nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

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Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

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CHAPTER II Money Market and its Instruments

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Money Market and its Instruments

Money Market: Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money

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market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and bankers acceptances are bought and sold. Benefits and functions of Money Market: Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of money market is to provide focal point for RBIs intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives. Money Market & Capital Market: Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.

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Money Market Futures and Options: Active trading in money market futures and options occurs on number of commodity exchanges. They function in the similar manner like any other futures and options.

The Definition of Money Market Instrument

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Money market instruments are liquid, short-term securities.

The money market refers to the part of the financial sector that trades in instruments with high liquidity and short maturity periods. Instruments traded in the money market have very short maturities, and participants in the market borrow and lend short-term instruments with maturity periods from several days to under a year. Common money market instruments include CDs (certificates of deposit), Treasury bills, commercial paper, federal funds and repos (repurchase agreements).

Characteristics of Money Market Instruments

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You may have heard of money market accounts and wondered if they were safe or what they contained. Money market instruments are really a form of debt issued by governments, private organizations and agencies of the government. Some examples of these types of instruments include commercial paper, banker's acceptances, short-term municipal securities and treasury bills.

What Is a Money Market Instrument?

The money market instruments normally have a maturation date of a year or less. For instance, if an importer needs money to get his product to a client but expects to receive payment within a short period, normally less than three months, he might use a banker's acceptance. This is a short-term loan or debt instrument. It is also a money market instrument. 1. Easily Sold Money market instruments create a market for active trading. Both the instruments and futures contracts on money market

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instruments create an active trading market. If the bank giving the loan wants to recoup their money for other loans, they can sell the bankers acceptance on the open market. Sometimes large institutions purchase them for money market accounts. Other times, investors simply buy the instruments as a secure short-term investment.

2. Liquidity: Money market instruments are liquid. They have a short investment period but you can also trade them on the open market. These two factors make them liquid, a term than means you can convert the instruments to cash easily.

3. Low Risk: Money market instruments are loans to entities of the highest credit rating. The short term to maturity is another factor affecting the risk. Unlike long-term notes where the credit rating could dramatically change after a number of years, short-term debt doesn't have that problem.

4. Buy at a Discount: When the issuer of a money market instrument creates the

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instrument, he includes the interest and principal in the face amount. When the issuer sells the instrument, he sells it at a discount price of its face amount. Once the instrument matures, the purchaser receives the entire face amount, thus gaining interest on his funds.

5. Break the Buck Insurance: Money market funds consist of money market instruments. If the instruments drop in value, so does the fund. If the value of a money market funds drop below a dollar, it "breaks the buck." This happened twice in the history of money market funds. Once, in 1994, there was a 4 percent drop in the normal $1.00 per share and a second time it occurred in September 2008 when the NAV of the money market funds of the Federal Reserve dropped below the dollar. The treasury offered a guarantee program on the funds issued after September 19, 2008 that lasted until September 19, 2009. The program is no longer in place, so, while safe, unless the product is a bank money market instrument backed by the FDIC, the principal has no guarantee.

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CHAPTER III Types of Money Market Instruments in India

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Types of Money Market Instruments in India

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Types of Money Market Instruments in India

The money market is a monetary system of lending and borrowing of short-term funds. After the globalization initiative in 1992, India has witnessed a growth in its money markets. Financial institutions have been employing money market instruments to finance the short-term monetary

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requirements of industries such as agriculture, finance and manufacturing. The money markets have performed well in the past 20 years. The Reserve Bank of India (RBI) has been playing the key role of regulator and controller of such money markets. The RBI intervenes regularly to curb crisis situations, such as liquidity crunching in the markets, by reducing the cash reserve ratio (CRR) or by pumping in more money.

Short Term Money Market instruments India

The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an opportunity for balancing the short-term surplus funds of lenders and the requirements of borrowers. By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. There is a wide range of participants(banks, primary dealers, financial institutions, mutual funds, trusts, provident funds etc.) dealing in money market instruments. Money Market Instruments and the participants of money market are regulated by RBI and SEBI.As a primary dealer SBI DFHI is an active player in this market and widely deals in Short Term Money Market Instruments. The below mentioned instruments are normally termed as money market instruments:

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1. Call/ Notice/ Term Money 2. Repo/ Reverse Repo 3. Inter Corporate Deposits 4. Commercial Paper 5. Certificate of Deposit 6. T-Bills 7. Inter Bank Participation Certificate

Explanation
1.

Treasury Bills (T-Bills):

Treasury Bills, one of the safest money market instruments, are short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period. T-bills are short-

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term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than their face value (par value). They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its face value. The difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument. T-Bills are issued through a bidding process at auctions. The bid can be prepared either competitively or non-competitively. In the second type of bidding, return required is not specified and the one determined at the auction is received on maturity. Whereas, in case of competitive bidding, the return required on maturity is specified in the bid. In case the return specified is too high then the T-Bill might not be issued to the bidder. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs.25K and in its multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182day and 364- day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks website. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction. Payment by allottees at the auction is required to be made by debit to

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their/ custodians current account. T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. NDS is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. RBI issues these instruments to absorb liquidity from the market by contracting the money supply. In banking terms, this is called Reverse Repurchase (Reverse Repo). On the other hand, when RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market. This is called Repo (Repurchase) transaction.

2. Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the

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securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interestmutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions. 3. Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a

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period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills; however chances of default are almost negligible but are not zero risk instruments. Commercial paper being an instrument not backed by any collateral, only firms with high quality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form. 4. Certificate of Deposit: 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. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw fundson 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

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done to generate the return. Accordingly, if the interest is paidannually, 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.

5. Bankers Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyers promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim onthe goods as collateral. The person drawing the bill must have a good credit rating otherwise the Bankers Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.

What do you mean by Treasury Bills ?

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Treasury bills (or T-Bills) mature in one year or less. Like zerocoupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by single price auctions held weekly. Banks and financial institutions, especially primary dealers, are the largest purchasers of T-bills. During periods when Treasury cash balances are particularly low, the Treasury may sell cash management bills (or CMBs). These are sold at a discount and by auction just like weekly Treasury bills. They differ in that they are irregular in amount, term (often less than 21 days), and day of the week for auction, issuance, and maturity. When CMBs mature on the same day as a regular weekly bill, usually Thursday, they are said to be on-cycle. The CMB is considered another reopening of the bill and has the same CUSIP. When CMBs mature on any other day, they are off-cycle and have a different CUSIP number. Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis.With the advent of

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Treasury Direct, individuals can now purchase T-Bills online and have funds withdrawn from and deposited directly to their personal bank account and earn higher interest rates on their savings.

Certificate of Deposit
A certificate of Deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest. In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in

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mid-2004, interest rates were expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market, the bond market, or other indices are introduced. A few general guidelines for interest rates are:

A larger principal should receive a higher interest rate, but may not. A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a recession)

Smaller institutions tend to offer higher interest rates than larger ones. Personal CD accounts generally receive higher interest rates than business CD accounts.

Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.

How CDs work ? CDs typically require a minimum deposit, and may offer higher rates for larger deposits. In the US, the best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000. However there are also institutions that do the opposite and offer lower rates for their "Jumbo CDs".

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The consumer who opens a CD may receive a passbook or paper certificate, it now is common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.

Interest Payout At most institutions, the CD purchaser can arrange to have the interest periodically mailed as a check or transferred into a checking or savings account. This reduces total yield because there is no compounding. Some institutions allow the customer to select this option only at the time the CD is opened.

Closing a CD Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturityunless the holder has another investment with significantly higher return or has a serious need for the money.

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Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD).

CD refinance In the U.S. insured CDs are required by the Truth in Savings Regulation DD to state at the time of account opening the penalty for early withdrawal. These penalties cannot be revised by the depository prior to maturity. The penalty for early withdrawal is the deterrent to allowing depositors to take advantage of subsequent enhanced investment opportunities during the term of the CD. In rising interest rate environments the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. The added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty.

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Ladders While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity cost is the "CD ladder" strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate), but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals. For example, an investor beginning a three-year ladder strategy would start by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which can then be reinvested, augmented, or withdrawn). The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank, which can be advantageous as smaller banks may not offer the longer terms found at some larger banks. Although laddering is most

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common with CDs, this strategy may be employed on any time deposit account with similar terms.

Deposit insurance In the US, the amount of insurance coverage varies depending on how accounts for an individual or family are structured at the institution. The level of insurance is governed by complex FDIC and NCUA rules, available in FDIC and NCUA booklets or online. The standard insurance coverage is currently $250,000 per owner or depositor for single accounts or $250,000 per co-owner for joint accounts until December 31, 2013. On January 1, 2014, the standard coverage limit will return to $100,000 per depositor for all accounts except for certain retirement accounts, which will remain at $250,000 per depositor. Some institutions use a private insurance company instead of, or in addition to, the Federally backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost. The Certificate of Deposit Account Registry Service program allows investors to keep up to $50 million invested in CDs managed through one

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bank with full FDIC insurance. However rates will likely not be the highest available.

Terms and conditions There are many variations in the terms and conditions for CDs. In the US, the federally required "Truth in Savings booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.

The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends. Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD.

Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.

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Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank run.

Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimumor any withdrawal of principal at allmay require closure of the entire CD. A US Individual Retirement Account CD may allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.

Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.

Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principalfor example, if principal is withdrawn three months after opening a CD with a six-month penalty.

Fees. A fee may be specified for withdrawal or closure or for providing a certified check.

Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Be careful as some otherwise

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respectable banks have been known to renew at scandalously low rates. Criticism CD interest rates closely track inflation. For example, in one situation interest rates may be 15% and inflation may be 15%, and in another situation interest rates may be 2% and inflation may be 2%. Of course, these factors cancel out, so the real interest rate is the same in both cases. In this situation, it is a misinterpretation that the interest is an increase in value. However, to keep the same value the rate of withdrawal must be the same as the real rate of return, in this case, zero. People may also think that the higher-rate situation is "better," when the real rate of return is actually the same. Also, the above does not include taxes. When taxes are considered, the higher-rate situation above is worse, with a lower (more negative) real return, although the before-tax real rates of return are identical. The afterinflation, after-tax return is what's important. Ric Edelman writes, "You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to."; on the other hand, bank accounts and CDs are fine for holding cash for a short amount of time.

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However Mr. Edelman's opinions may apply only to "average" CD interest rates. In reality, some banks pay much lower than average rates while others pay much higher rates (differences of 100% are not unusual, eg, 2.50% vs 5.00%). In the India, depositors can take advantage of the best FDIC-insured rates without increasing their risk.[8] Furthermore, a long-term CD might have a high nominal interest rate with a relatively low real interest rate due to high inflation at the time of purchase (as indicated above); however inflation rates often change rapidly and the final real interest rate could be significantly higher than riskier investments. Finally, Mr. Edelman's statement that "CD interest rates closely track inflation" is not necessarily true. For example, during a credit crunch banks are in dire need of funds and CD interest rate increases may not track inflation.

Forex Swaps
In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward); see Foreign exchange derivative.

Uses

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By far and away the most common use of FX swaps is for institutions to fund their foreign exchange balances. Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. To do this they typically use tom-next swaps, buying (selling) a foreign amount settling tomorrow, and selling (buying) it back settling the day after. The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades.

Pricing
The relationship between spot and forward is as follows:

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where:

F = forward rate S = spot rate r1 = simple interest rate of the term currency r2 = simple interest rate of the base currency T = tenor (calculated according to the appropriate day count convention)

The forward points or swap points are quoted as the difference between forward and spot, F - S, and is expressed as the following: where r1 and r2 are small. Thus, the absolute value of the swap points increases when the interest rate differential gets larger, and vice versa

CURRENCY SWAP:
A transaction in which the bank agrees to exchange specified amount of one currency for another currency on future dates at a fixed price Cash flows can be exchanged for both principal and interest (cross-currency swap), interest only (coupon-only swap) and only principal (principal-only swap)

INTEREST RATE SWAP:

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A transaction in which the Bank contracts to exchange a fixed interest liability for a floating interest rate liability or vice versa on behalf of the client No exchange of principal amount, only difference in cash flows are settled Benchmark rates from NSE MIBOR, 1-year INBMK, 5 year INBMK rates are normally used.

Commercial Paper
In the global money market, commercial paper is a unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued (sold) by large banks and 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 dates 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.

History

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Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th century. For instance, Marcus Goldman, founder of Goldman Sachs, got his start trading commercial paper in New York in 1869.

Issuance
There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then sells the paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of bank holding companies. Most of these firms also are dealers in US Treasury securities. Direct issuers of commercial paper usually are financial companies that have frequent and sizable borrowing needs and find it more economical to sell paper without the use of an intermediary. In the India, direct issuers save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer fees tend to be lower outside the India.

Line of credit

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Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.

Advantage of commercial paper:

High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies. Issuances of Commercial Paper bring down the bank credit limits. A high degree of control is exercised on issue of Commercial Paper. Stand-by credit may become necessary

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Euro dollar
Eurodollars are deposits denominated in U.S. dollars at banks outside the India, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term was originally coined for U.S. dollars in European banks, but it expanded over the years to its present definition: a U.S. dollar-denominated deposit in Tokyo or Caracas would be likewise deemed a Eurodollar deposit. There is no connection with the euro currency. More generally, the "euro" prefix can be used to indicate any currency held in a country where it is not the official currency: for example, euroyen or even euroeuro.

History
Gradually, after the Second World War, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II. As a result, enormous sums of U.S. dollars were in the custody of foreign banks outside the India. Some foreign countries, including the Soviet

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Union, also had deposits in U.S. dollars in American banks, granted by certificates. During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28, 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed "Eurbank dollars" after the bank's telex address, they eventually became known as "eurodollars"[2] as such deposits were at first held mostly by European banks and financial institutions.[2] These deposits were lent on as US dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the USA and being paid in dollars, thereby avoiding currency risk. Gradually, as a result of the successive commercial deficits of the India, the eurodollar market expanded worldwide
An individual player cannot invest in majority of the Money Market Instruments, hence for retail market, money market instruments are repackaged into Money Market Funds. A money market fund is an investment

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fund that invests in low risk and low return bucket of securities viz money market instruments. It is like a mutual fund, except the fact mutual funds cater to capital market and money market funds cater to money market. Money Market funds can be categorized as taxable funds or non taxable funds. Having understood, two modes of investment in money market viz Direct Investment in Money Market Instruments & Investment in Money Market Funds, lets move forward to understand functioning of money market account. Investment in Money Market Direct Investment in Money Market Instruments Investment in Money Market Funds Parking money in Money Market Account Money Market Account: It can be opened at any bank in the similar fashion as a savings account. However, it is less liquid as compared to regular savings account. It is a low risk account where the money parked by the investor is used by the bank for investing in money market instruments and interest is earned by the account holder for allowing bank to make such investment. Interest is usually compounded daily and paid monthly. There are two types of money market accounts: Money Market Transactional Account: By opening such type of account, the account holder can enter into transactions also besides investments, although the numbers of transactions are limited. Money Market Investor Account: By opening such type of account, the account holder can only do the investments with no transactions. Money Market Index:

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To decide how much and where to invest in money market an investor will refer to the Money Market Index. It provides information about the prevailing market rates. There are various methods of identifying Money Market Index like: Smart Money Market Index- It is a composite index based on intra day price pattern of the money market instruments. Salomon Smith Barneys World Money Market Index- Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index. Bankers Acceptance Rate- As discussed above, Bankers Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the bankers acceptance is traded in secondary market, is also used as a money market index. LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves as good money market index. This is the interest rate at which banks borrow funds from other banks.

Steps taken to develop Money Markets India

Role of the Reserve Bank of India in the Money market: The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct purview of the Reserve bank regulations. The aims of the Reserve Banks operations in the money market are: 1. to ensure that liquidity and short term interest rates maintained at levels consistent with the monetary policy objectives of maintaining price stability;

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2. to ensure an adequate flow of credit to the productive sectors of the economy; and 3. to bring about order in the foreign exchange market. The Reserve Bank influences liquidity and interest rates through a number of operating instruments cash reserve requirements (CRR) of banks, conduct of open market operations (OMOs), repos, change in Bank rates and at times, foreign exchange swap operations. The money market in India is divided into the formal (organized) and informal (unorganized) segments. One of the greatest achievements of the Indian financial system over the last fifty years has been the decline in the relative importance of the informal segment and increasing presence and influence of the formal segment. Several steps were taken in the 1980s and 1990s to reform and develop the money market. The reforms in the money market were initiated in the latter half of the 1980s. In the 1980s: A committee it review the working of the monetary system under the chairmanship of Sukhamoy Chakravorty was set up in 1985. It underlined the need to develop money market instruments. As a follow up, he Reserve Bank set up a working group on the money market under the chairmanship of N Vagul which submitted its report in 1987. This committee laid the blueprint for the institution of a money market. Based on its recommendation the Reserve Bank initiated a number of measures: The Discount and Finance House of India (DFHI) was set up as a money market institution jointly by the Reserve Bank, public sector banks, and financial institutions in 1988 to impart liquidity to money market instruments and help the development of a secondary market in such instruments. Money market instruments such as the 182-day treasury bill, certificate of deposit, and inter-bank participation certificate were introduced in 1988-89. Commercial paper was introduced in January 1990. To enable price discovery, the interest rate ceiling on call money was freed in stages from October 1988. As a first step, operations of the DFHI in the call/notice money market were freed from the interest rate ceiling in 1988. Interest

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rate ceilings on inert-bank term money (10.5 11.5 per cent), rediscounting of commercial bills (12.5 per cent), and inter-bank participation without risk (12.5 per cent) were withdrawn effective May 1989. All the money market interest rates are, by and large, determined by market forces. There has been a gradual shift from a regime of administered interest rates to market-based interest rates. In the 1990s: The government set up a high-level committee in August 1991 under the chairmanship of M Narasimham (Narasimham Committee) to examine all aspects relating to structure , organization, functions, and procedures of the financial system. The committee made several recommendations for the development of the money market. The Reserve Bank accepted many of its recommendations. The securities Trading Corporation of India was step up in June 1994 to provide an active secondary market on government dated securities and public sectors bonds. Barriers to entry were gradually eased by selling up the primary dealer system in 1995 a satellite dealer system in 1999 to inject liquidity in the market. Several financial innovations in instruments and methods were introduced. Ad hoc and on-tap 91-day treasury bills were discontinued. They were replaced by Ways and Means Advances (WMA) linked to the Bank rate. The introduction of WMA led to the limiting of the almost automatic funding of the government.

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CHAPTER IV QUESTIONRIES

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QUESTIONRIES
1. What is Commercial Paper (CP)? Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. 2. When it was introduced? It was introduced in India in 1990. 3. Why it was introduced? 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 satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. 4. Who can issue CP?

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Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. 5. Whether all the corporate would automatically be eligible to issue CP No. A corporate would be eligible to issue CP provided a. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore b. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and c. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

6. Is there any rating requirement for issuance of CP? And if so, what is the rating requirement? Yes. 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. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review and the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. 7 What is the minimum and maximum period of maturity prescribed for CP? CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. 8 What is the limit up to which a CP can be issued.

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The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 9. In what denominations a CP that can be issued? CP can be issued in denominations of Rs.5 lakh or multiples thereof.

10. How long the CP issue can remain open? The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

11. Whether CP can be issued on different dates by the same issuer? Yes. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date. Further, every issue of CP, including renewal, shall be treated as a fresh issue. 12. Who can act as Issuing and Paying Agent (IPA)? Only a scheduled bank can act as an IPA for issuance of CP. 13. 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, amount invested by single investor should not be less than Rs.5 lakh (face value).

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However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI. 14. Whether CP can be held in dematerialized form? Yes. CP can be issued either in the form of a promissory note (Schedule I) or in a dematerialized form through any of the depositories approved by and registered with SEBI. Banks, FIs, PDs and SDs are directed to hold CP only in dematerialized form. 15. Whether CP is always issued at a discount? Yes. CP will be issued at a discount to face value as may be determined by the issuer.

16. Whether CP can be underwritten? No issuer shall have the issue of Commercial Paper underwritten or coaccepted. 17. What is the mode of redemption? Initially the investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP, (a) when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. (b) when the CP is held in demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA. 18. Whether Stand by facility is required to be provided by the bankers/FIs for CP issue? CP being a `stand alone product, it would not be obligatory in any manner on the part of banks and FIs to provide stand-by facility to the issuers of CP. However, Banks and FIs have the flexibility to provide for a CP issue, credit

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enhancement by way of stand-by assistance/credit backstop facility, etc., based on their commercial judgement and as per terms prescribed by them. This will be subjected to prudential norms as applicable and subject to specific approval of the Board. 19. Whether non-bank entities/corporates can provide guarantee for credit enhancement of the CP issue. Yes. Non-bank entities including corporates can provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided : a. the issuer fulfils the eligibility criteria prescribed for issuance of CP; b. the guarantor has a credit rating at least one notch higher than the issuer by an approved credit rating agency and c. the offer document for CP properly discloses: the networth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked. 20. Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating Agency Issuer: a. Every issuer must appoint an IPA for issuance of CP. b. The issuer should disclose to the potential investors its financial position as per the standard market practice. c. After the exchange of deal confirmation between the investor and the issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CP to the investor's account with a depository. Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order (Schedule III). Issuing and Paying Agent

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a. IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilised through issuance of CP is within the quantum indicated by CRA for the specified rating. b. IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorised executants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a valid agreement with the issuer (Schedule III). c. Certified copies of original documents verified by the IPA should be held in the custody of IPA.

Credit Rating Agency a. Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of capital market instruments shall be applicable to them (CRAs) for rating CP. b. Further, the credit rating agency have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for review. c. While the CRAs can decide the validity period of credit rating, CRAs would have to closely monitor the rating assigned to issuers vis-a-vis their track record at regular intervals and would be required to make its revision in the ratings public through its publications and website 21. Is there any other formalities and reporting requirement with regard to CP issue. Fixed Income Money Market and Derivatives Association of India (FIMMDA), as a self-regulatory organisation (SRO) for the fixed income money market securities, may prescribe, in consultation with the RBI, any standardised procedure and documentation for operational flexibility and smooth functioning of CP market. Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central

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Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule II.

CHAPTER V Conclusion

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Conclusion
Many economists argued that money market instrument sector represented the new beginning of the international capitalism. They traced the evolution of the money market instrument sector to the development of transnational corporations. In this context the evolution of the international banking came as a response to the modern phenomenon of capital which obviously goes beyond national borders. At the same time the rapid growth and boom of the technology sector gave a great incentive and facilitated the creation of the international money market instrument area. This permitted global access of world market information and subsequently its management and control.

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Under the traditional national and international sectors there were several constraints which gave the possibility for offshore activity to grow. These are: the extension of national tax bases; intermittent fiscal and monetary instabilities; the existence of foreign exchange controls and fluctuations; limiting cross-border controls; conservative banking laws and regulations with regard to foreign and domestic industrial entry, systems of supervision and liquidity requirements, constraints on the issue of foreign and domestic bonds, the admission of securities to capital markets, stock exchange, insurance regulations ; company laws which restricted business. Also it has to be mentioned from the international perspective there was a lack of coherent set of international fiscal principles and laws in which transnational company could operate across border. The evolution of the money market instrument center is described from the perspective of its tax and banking functions. More recently, however, other constraints onshore have served as an incentive element which pushed for offshore investment and have emphasized the importance of that investment. These include: the need to provide for what is seen as the vulnerability of professionals and investors to creditors; the desire to avoid onshore laws and regulations which mandate the reservation of

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assets to spouses and heirs; the need for savings and investment vehicle for ordinary persons. Money market instrument center came with innovative solutions to all these constraints that were mentioned above. Let us refer for example to taxation. There are 3 models of money market instrument centers from the perspective of taxation: with zero-tax (here even residents do not pay taxes); with low-tax; tax at normal rates but exemption or other preferential treatment is granted to non-resident investors or investment for certain categories of income. Notwithstanding the fact that the above categories refers only to tax aspects of money market instrument activity, it clearly shows the scope of such centers.

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Bibliography
From the International Banking & Insurance textbook of T.Y. B&I. INTERNATIONAL BANKING K VISWANATHAN INTERNATIONAL BANKING DEEPAK ABHYANKAR

Webilography
www. Wikipedia.com www.ANSWERS.COM www.CANARA. COM www.google com