Money Markets Instruments

CHAPTER-3
Markets
A financial market is an integral part of financial system of any economy. A

market is a place or mechanism or place which facilitates tFansfer of resources from
one entity to another. A financial market is an institution or arrangement that facilitates
the exchange of financial instruments, like shares debentures loans etc. A market
wherein financial instruments, financial claims, assets and securities are traded is
known as ' financial market'.
Classification of Financial Market

1. Primary and secondary market
2. Capital and money market.
Copyright © 2009. Global Media. All rights reserved.
(A detailed discussion about financial market has been made in first chapter)
CALL MONEY MARKET

It is a market wherein day today surplus funds are traded by financial institutions,
mainly by banks. Call money market is an integral part of money market of any
country.
The most active segment of the money market has been the call money market,
where the day to day imbalances in the funds position of scheduled commercial
banks are eased out. The call notice money market has graduated into a broad and
vibrant institution.
Appannaiah, H.R., et al. Financial Markets and Services, Global Media, 2009. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/inflibnet-ebooks/detail.action?docID=3011227.
Created from inflibnet-ebooks on 2018-08-04 02:38:38.
78 Financial Markets &; Services
Call/Notice money is the money borrowed or lent on demand for a very short
period. When money is borrowed or lent for a day, it is known as Call (Overnight)
Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus
money, borrowed on a day and repaid on the next working day, (irrespective of the
number of intervening holidays) is "Call Money". When money is borrowed or lent
for more than a day and up to 14 days, it is "Notice Money". No collateral security
is required to cover these transactions.
This is the market for very short term funds, known as money on call. The rate
at which funds are borrowed in this market is called 'Call Money rate'. The size of
the market for these funds in India is between Rs 60,000 million to Rs 70,000 million,
of which public sector banks account for 80% of borrowings and foreign banks/
private sector banks account for the balance 20%. Non-bank financial institutions
like lOBI, L1C, GIC etc participate only as lenders in this market. 80% of the
requirement of call money funds is met by the non-bank participants and 20% from
the banking system
The entry into this field is restricted by RBI. Commercial Banks, Co-operative
Banks and Primary Dealers are allowed to borrow and lend in this market. Specified
All-India Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders. Reserve Bank of
India has recently taken steps to make the call/notice money market completely
inter-bank market. Hence the non-bank entities will not be allowed access to this
market beyond December 31, 2000.
From May 1, 1989, the interest rates in the call and the notice money market
are market determined. Interest rat~s in this market are highly sensitive to the demand
- supply factors. Within one fortnight, rates are known to have moved from a low of
1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day
variations are also not uncommon. Hence there is a high degree of interest rate risk
for participants. In view of the short tenure of such transactions, both the borrowers
and the lenders are required to have current accounts with the Reserve Bank of
India. This will facilitate quick and timely debit and credit operations. The call
market enables the banks and institutions to even out their day to day deficits and
surpluses of money. Banks especially access the call market to borrow/lend money
for adjusting their cash reserve requirements (CRR). The lenders having steady inflow
of funds (e.g. L1C, UTI) look at the call market as an outlet for deploying funds on
short term basis.
Markets 79
Features of Call ~oney ~arket
1. This market deals in very short period funds, ranging from one day to
fortnight
2. This market is very sensitive to any changes in financial system
3. In case of call money market funds are borrowed or lent very quickly
4. Investment in call money market is quite profitable
5. Interest charged in this market is called as call rates
6. Call rates in call money market is very volatile
7. Call money markets are mainly located in major commercial centers like
Mumbai, Delhi, Chennai etc.
Main participants in call money market are
• Scheduled commercial banks
• Non- Scheduled commercial banks
• State, district, and urban co-operative banks
• Foreign banks
• Discount and finance house of India (DFHI)
• Securities trading corporation of India
80 Financial Markets It Services
Table showing the average daily turnover in call money market between August
2005 to November 2006.
AVERAGE DAILY TURNOVER IN CAlL MONEY MARKET

(R6. c:ore)
f'oMogl1t~d' "'' 'eIa{Ie Dalll' C~ Money r umC<ler
Balas PJiIll&)' Deale!> N<JIl.BriIr.sri~ TOIIl
i:!~<lWI~ le:'!ding. 6o;.0\1'''":!l' lendil1g$ l6lldl!lg&

j 2 3 4 5 6 7
A~t 5, l'.lIl5 6,219 804 ~G15 21 312 11.181

AU!llI$I lS. 2005 ~.;Ill> 5Y'j~ 1.81~ 2 - 12.00i
S~ l. 2005 7~ 9.795 2.517 7 - 19.6011
Se~ 16. 2005 S6Uj 88'd7 2.306 24 - 17,830
Sep\er.1bet 30. L005 62'12 8022 1.794 « - 1&.132
0ct0IJet 14. 2005 6.681 a,~2 19;,~ ~ - 11.222
~ la. 2005 '1.194 895~ 2,~OO j1~ - 18.133
~ 11 2005- 9900 1~ 1l6! 2.449 2~ - 24.562
~-bef 25. 2t.'(l5 80S3 9.918 1952 111 - 20.071
~ 9. 2005 7.111 9121 2,632 22 - 19.,.,.
Dece<1W' 21. 2005 8,931 11,&64 2912 2M - 23.811
Ja>uiIy 6. 2005 PIll 9W 2,101 68 - 18.432
Ji!I.'UII)' 2$. 2005 1264 8.621 1.431 86 - H.421
Februaly 3. 2\)'Jl\ H94 fWa 10:>2 46 - 1$.0$3
feblUely 11. LOOt ~ 7112 5t.4! r83 23 - 11.129
Marcil 3. 2tltl6 M~ T8U 9IJ3 15 - 15.666
Marcil 17. 2{)(){i 75$5 8.722 1221 61 - 17,565
Mif.:;Il 31. 2006 7~1 9100 I,GOt) 7t - 11.41$
Apm 14. WIG 6,810 8,008 1m 32 - 16.199
April 28. lOt" 7.339 8.648 1353 43 - 17,383
Iley 12. 2006 6.102 8196 j S15 19 - 16,434
MIIY 2.6 200& 7,8$1 9303 1353 31 - 1"*9
JU'l8 9. 2006 6.41~ 1365 989 1$ - 14,805
JUlIe 21 2t.'OO 7.498 8.614 1 l33 IS - 17.263
-
July 7. 2006 9,216 10,9sa 1742 32 22.039

July 21. 2006 7.~9 9461 1.8..'10 12 - 18,998
AIl9IlS! 4. 2tlIl6 7206 8563 t4!1 34 - 11,2U
Sep!emtef 15. 2tlIl6 9.5~ !2,(/!)~ 2.524 \.I - 24.120
$eplembef 29. LOOO ,0 Il84 ,2,(I!J,3 ~25;; 23~ - 2.4.&14
();tOOer 1$. 2006 9366 113li2 2018 63 - 22.U9
<.Xtober 2,. ZOO6 11,829 ':3JW 212{J 332 - 21.898
~ 1~. 2005 ~2,5n 14.23:; ~ 962 m - 29..089
• Er.ectve IoI1mgIlI eoded .hme 2S. l"1lO( da!a ;~ 1r0!l1 68 Sal'll\$, 17 PMla!y Dealers aIh1 s:~ Noo-Sank ~tion&
Notes : I. Oata p.CMS'IH'<8i.
2. $i.'l-;e A~~'$I6. 2006 eligible ~ are BaIl;'s 81"(! Pnma<y Oe3!e;s.
Markets 81
Table showing the daily call money rates market between October to November
2006.
DAILY CALL MONEY RATES
Alen Range 01 Rates ~lgMea Average R61es

Bom!win9s lenrlm·~s BOHOWi!lQ5 ler.d;ngs
1 2 J ~ 5
0cmbeI 3. 2006 560 . 7.50 500 . 750 656 6.56

0r:I0ber 4, 2OCJ6 5.i.',o . S.S5 5.GO • 6.95 5.51 651
Ocmber 5. 2000 190 . 6.75 19t1 . ~.75 643 6.43
~ 6. 2006 570 • 6.1'5 !HO • 6.!S S.4Q 6.~
Oclober 7. 2006 ~.80 ' ~50 ~.8Il • 6.50 63S 639
Ocmber 8. 2000 560 . Hl 581l • 5.50 639 6.li
Ocloow 9, 2(11)(; 5.51) . S 15 5.50 . 6.75 Me 6.40
Ocmbe! 1Il. 2006 555 . 720 555··720 6.41 6.41
O;;(ober \1 2006 560 . b!5 500 • 6.15 0.42 6.42
~1ObII< 12. 2006 ~.rO • Ii ao HI} • 680 641 6.41
OcIDber 13. 2006 525 . 69ii 525·695 6.53 6.$
OWliw. 14, 2(06 585 . 6.75 585 . 6.75 5.56 656
Ocmbe! 16. 2006 565 ·590 565·590 656 6.%
O;;tober 11 2006 570·'OS 570·705 oTa 6.78
October 18, 2(X)6 5.n· ;'&.; 5.15 ' 105 S.OO 600
l.)c!ober 19, 2000 515 . 1.25 5.75 • 1.25 6.811 6.ll1!
0r:I0ber 20. 2(06 575 . 730 5.75 . 730 1.C~ 7,00
0c!llbeI 23, 2006 575 . i.85 5.75 • i.85 715 115
0;;. 26. 2006 580 . 775 500 • 1.75 69& 600
Oclober 27~ 2006 5.75 • 760 5.15 • 760 S.95 69S
0cIDber 2lI, 2006 1>.90 • 735 5.00 • 7.35 iHI.l 6.lfl
Odober 30. 2000 575· '.25 5.75·725 S.a.3 6.$3
00Dber 11, 2006 577·750 517 • 750 1186 6..8&
~
.
'< 2006 5.80 .
~.60
125 5.80 . 725 S.S2 692
Novtmber 2. 2006 . 120 1>.811 • '.20 6.<J6 6.96
N!Nember 3. 2006 580 • T.15 5.00 • 1.15 5.9!> 6.9!>
Navember 4, 2006 5.75 . 1.10 5.15 . 7.10 5,91 6,91
Novembaf 6, 2006 560 . 7.30 500 .. 1.30 100 7.00
November ~
'< 2006 5.75 . 730 5.15 . 730 S.92 692

November 8, 2000 5.1~ • 7 &.; 5."15 • r.O~ 681 6.61

~er S. 2006 575 • T.OS 575 • '1.05 5.12 6.12
~ le. 2OCJ6 575· 70s 575 . 7>05 5.67 6.51
NoVembEif 11, 2006 500 . 7.25 SOIl· 1.25 671 6.71
NoVember II 2ilO6 575 . 770 575 . 770 S.n 671
November 14- 2001l 580 . <' z:; !>8tl • l'b a\il 691
~ 15. 2006 580> 145 58().145 f01 7.01
~ber 16. 'lel()6 5M . 740 sac· 740 7.09 7.09
NMmbef 17, 2006 590 . 7.40 59tl • 140 714 114
November la. 2(l()(; 6CI(j·725 500 . 7.25 5.S1 6.91
Mwambei :ro. 2006 590 . 7.25 59tl .. 1.25 102 1.tl2
82 Financial Markets &. Services
TREASURY BILL MARKET.

Treasury Bills are very important constituent of money market instrument. It is
issued by government. Treasury Bills are short term (up to one year) borrowing
instruments of the union government. It is an IOU ofthe Government. It is a promise
by the Government to pay a stated sum after expiry of the stated period from the
date of issue (14/91/182/364 days i.e. less than one year). They are issued at a
discount to the face value, and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at each auction.
Treasury bills have greater liquidity than other bills and are sold to general public
and banks.
The salient features of the T-Bills are:
• The 14/91 /182/364-days bills are issued for a minimum value of Rs.25,OOO
and multiples thereof.
• They are issued at a discount to face value.

• T-bills are issued by RBI on behalf on central government.
• Any person in India including individuals, firms, companies, corporate
bodies, trusts and institutions can purchase the bills.
• The bills are eligible securities for SLR purposes.
• All bids above a cut-off price are accepted and bidders are permitted to
place multiple bids quoting different prices at each auction.
• The bills are generally issued in the form of SGL - entries in the books of
Reserve Bank of India. The SGL holdings can be transferred by issuing a
SGL transfer form. For non-SGL account holders, RBI has been issuing the
biils in scrip form.
Types of Treasury Bills
Treasury bills (T-bills) offer short-term investment opportunities, generally up to

one year. They are thus useful in managing short-term liquidity. At present, the
Government of India issues four types of treasury bills, namely
• 14-day
• 91-day
Markets 83
• 182-day
• 64-day.
Amount of Investment in T-bills

T-bills are available for a minimum amount of Rs.25,OOO and in mUltiples of Rs.
25,000. T-bills are issued at a discount and are redeemed at par.
Auction system
While 14-day and 91-day T-bills are auctioned every week on Fridays, 182-day
and 364-day T-bills are auctioned every alternate week on Wednesdays. The Reserve
Bank of India issues a calendar of T-bill auctions. It also announces the exact dates
of auction, ~he amount to be auctioned and payment dates by issuing press releases
prior to every auction.
Type of Day of Day of

T-bills Auction Payment*
14-day Friday Followll1g Saturday
91-day Friday Following Saturday

182-day Wednesday of non-reporting week Following Thursday
364-day Wednesday of reporting week Following Thursday
• If the day of payment falls on a holiday, the payment is made on the day after the holiday.
Payment
Payment for purchase of 14 and 91-day T-bills by successful bidders has to be
made on the Saturday following the Friday auction; and payment by successful bidders
for 182-day and 364-day T-bills has to be made by successful bidders on the following
Thursday. Payment by successful bidders at the auction are required to be made by
cash/cheque drawn on the Reserve Bank of India or by Banker's Pay Order.
Participation
Provident funds can participate in 14 and 91-day T-bill auctions as non-
competitive bidders. Provident funds as yet are not allowed to purchase 182-day
and 364-day T-bills as non-competitive bidders. Participation as non-competitive
bidders would mean that provident funds need not quote the rate of yield at which
84 Financial Markets ... Services
they desire to buy these bills. The Reserve Bank allots bids to the non-competitive
bidders at the weighted average yield arrived at on the basis of the yields quoted by
accepted competitive bids at the auction. Allocations to non-competitive bidders
are outside the amount notified for sale. In other words, provident funds do not face
any uncertainty in purchasing the desired amount of T-bills from the auctions.
Turnover in treasury bill in India

TURNOVER IN GOVERNMENT SECURITIES MARKET (FACE VALUE) AT MUMBAI
IRs. C<ll<i!)
WeaiMo!1\.~ , 00>1. of l'lClIa Slals Treawy rus RBI'
Datee Go.l
Secur~ Sewnlies lI1~ 1{fl !mI ~~
1 2 3 4 5 6 1
~
j\pri I.lIll.O!!!.70 l.363.~9 6.64669 - 1~.412.36 T.~9
~ 3.34.695.16 2C-51.15 5.2';}B 12 - l1!i2C.65 5.568!O

J~IJe 3.00.8:3.16 J.ll64.23 5.400 37 - 1l.67il.06 44.6~
.Jut, 2~7 538.63 1.532~ 9.14996 - 10.30044 5100
AuglSSt 4.W.S 18.26 4.926.5\1 14.764.11 - 11.628.46 11.5016.30
~f 2.1U.4n22 2\)2300 14.3:11lM - 11.30022 5.10'143
Ocmber 41\).24688 314678 9.81613 - 11.&5a.u! 13,96516
NowmIler 173.544.66 UOO70 7.SOO96 - 9.10016 'IIl.91
(~ 1,53118.26 2.438.S4 6.205.72 - 7.221.S4 131.71
JaI1IJa!Y 2,001136.04 2.603.3-1 7.7'3.2U - 12.43444 6.Z2!I.~
FeI'AIart \,4{).041.00 2.62HO 6.5'J9.2U - llSl2.ro 35.03
r.t.ardl !.9 7.96S42 4'100;14 6.!l12~ - IS.!6Soo 6661
~
.~priI 3,32.182M 3.~32{)4 15.m 44 - 15.5n.~ 239.S9
~ '.lIUW.74 2.lI8116 2l.:rJ8.44 - 13,136.10 116.42
JUf}! !.72.~.22 5.es~ 40 18.268 Sll - 15.ll33.12 00.15
Jtjj t.3",915.12 5.4$9.54 27953.40 - 15,035.68 230.1&
August '.16.()I}288 !73100 238>\826 - 10.226.ell ~S9
$l!jlterrlbeo' !.""'.96114 4.40-3~'6 25.$1.00 - 12..2!iO.28 102.46
Oc!oI:e' 1.26.509.78 8.5'5~ 2€•. lSI.56 - 17,07U2 189.37

No\<emIler 75.:\J(I.2~ J.lI34.':-o (5.W7.42 - 2ll.297.32 342.29
DeI1emte:' ;.3S.875.m U15.!iO 25.69433 - 2e.39!1!15 474.l!I
JaI'UJr'l Hl5,1()U4 5227.8>1 lSI4S.52 - 26-1350& 392.75
Febl\Jsry l.25.45700 2.33300 2Ull1590 - J.}21S,~ 4623
Marctl 79642.52 1.770.32 2O.2'Jl.04 - ~1.3n.4/! 364.69
EWi
Apli \ .()!i.95T.84 2.616.60 39.4M.32 2.a~2.J2 46,996.a6 263.33
tJ8t ;J(l.28Il7{) 4'l92!l4 13.!l62{!4 1.e39 16 30.69652 325.~
YiB&ied
JIlIl 3 2005 31.044.00 1.542.56 3.!t8402 91732 £.797.00 m
Ju.1. l(l. 2005 7G.251.10 t455.C-o 3.:..9 78 12504 4.867.$ 9
.)un Jr . ~ 2li.~~.94 l.~&! 2.m.~ 691.00 1.616.46 230
Jun. 24. 200'j 56. !!lS.24 13:f.ZJ 2.~M 959.12 3.374.90 288
@. Basf(j on SQ. MY4ht ;rar;sacl!arn! t'l yO\<e!'Ill'l'.eIlI &!'.:Il!iaes ,n SIlooroda:v "1atl.et &t Mttmbai. n(Acwoos !lIIlO t:'a:-.sactons.
.. . lumaver ~ d1e IastF<id;rf afllle r<1C!llh Mf Ole ~ Foo.,'1'f oI~lIg mDl1l'1.
• . RBI's 5ae6 and Puf1:llases i~e t~s;."COOflO ;r. otI1~r o/fll)E$ $). nexcklCeS !Tar.sacw.s relaliPg ill jPe ~nt of India and 8le W~¥e ~. Bhcpit
Markets 85
Outstanding value of Government treasury bill

GOVERNMENT OF INDIA: 91 DAY TREASURY BILLS
IOutstaf\dillg at Face Valu&}
fl.I.1reb 311 La&t

Reserve Boo;. oflndia 8ailk$ Sl8te~ Otler$ Foreigp Cel$a! Banks
Fri6<Ivi FiWI T~' AUCliOll T<1I' Aucllon T~ j\.~ TE4l" Auclion T~ ~
Red$co~ Ad /IQC$
I 2 .l 4 5 Q 7 g 9 16 11 12
Ma.31 1m - - 22( - 827 - - - 249 - 200

MiI'. 31, mJ - - lSS - ~5? - - - 4~~ - 220
Mlrl1 2001 - - fs7 - &is - - - 153 - 6JO
Mil' 31, m - - 154 - 2.292 - 4SO - 350 - ,-3(}~
t.\a', aI, 2003 - - - - 642 1 - 1100 - 'f1lU - 700

Ma' 31. 2ro! - - - - 3.943 - iiCl) - 1.452 - 39
Ma' a~, ~ - - - - 215m - U~ - 4.485 - 32
JaIl, 2004 - - - - 2,624 - 200 - 2.'129 - -

Feb, 2004 - - - - 2.8$ - 200 - 2422 - 39
M5' 2004 - - - - 3,700 - eoo - ',266 - 39
Apr. 2004 - - - - 5.195 - 700 - (,,3(}4 - 39
MIt 2004 - - - - 10,02$ - 1100 - 3,276 - 39
.}om, 2004 - - - - 13,741 - 1.200 - &.m - 39
JIll 2004 - - - - 15.739 - 1.100 - 10,261 - 39
.Ao.Ig. 2004 - - - - 16.34~ - uru - 1J,40~ - 24
Sep, 2004 - - - - 16466 - 127() - 6,969 - 24
<XI. 2004 - - - - 11.'l32 - tQru - 5J5T3 - 25
NDiI. 2004 - - - - 14723 - I,SOO - 4,982 - 25
Dec. 2004 - - - - 14.800 - 2.28t - ~.1!!1 - 32
JIll. 2005 - - - - 15.03!) - t88C - 4.969 - 32
r1ill, 2005 - - - - 20.€$ - 1.400 - 4.32tJ - 32
MIr. 2005 - - - - 21.t7S - 1.755 - 4,$29 - 32
Apr. 2005 - - - - 22.1!!1 - 298() - 3.824 - 14
M't( 2005 - - - - 22.14{l - Hac - l,8t\S - 32
ria Ended
~ 3 2005 - - - - 21639 - 3,793 - 4.360 - 32
Jur.9 10. 2005 - - - - 218S2 - 3,725 - 4.113 - 25
Jvr.e 11. 2lXJ6 - - - - 22.m - 3-8~ ...,.. 3.711 - 32
Jvr.e 24. m - - - - 22,285 - 3,86E - 3,715 - 25
86 Financial Markets" Services
COMMERCIAL BILL MARKET

Commercial bill market is one of the constituent of money market instrument.
Market for buying and selling of commercial bills of exchange is known as '
commercial bill market.
Bills of exchange are negotiable instruments drawn by the seller (drawer) on

the buyer (drawee) for the value of the goods delivered to him. Such bills are called
trade bills. When trade bills are accepted by commercial banks, they are called
commercial bills. If the seller wishes to give some period for payment, the bill would
be payable at a future date (usance bill). During the currency of the bill, if the seller
is in need of funds, he may approach his bank for discounting the bill. One of the
methods of providing credit to customers by bank is by discounting commercial
bills at a prescribed discount rate. The bank will receive the maturity proceeds (face
value) of discounted bill from the drawee. In the meanwhile, if the bank is in need
of funds, it can rediscount the bill already discounted by it in the commercial bill
rediscount market at the market related rediscount rate. (The RBI introduced the Bill
Market Scheme in 1952 and a new scheme called the Bill Rediscounting Scheme in
November 1970).
Meaning of Bills of Exchange

According to the Negotiable Instruments Act 1881, a bill of exchange is defined
as an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of
a certain person or to the bearer of the instrument. The following features of a bill of
exchange' emerge out on the basis of this definition.
• A bill of exchange must be in writing and not oral.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bi II of exchange must sign it.

• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person. The amount

mentioned in the bill of exchange is payable either on demand or on the
expiry of a fixed period of time ..
• It must be stamped as per the requirement of law.

Markets 87
According to the Negotiable Instruments Act, a bill of exchange is generally

drawn by the creditor on his debtor. It has to be accepted by the debtor or someone
else on his behalf. It is called a draft before its acceptance. Therefore, one of the
underlying features of a bill of exchange is that it has to be ccepted either by the
person upon whom it is drawn or by someone else on his/her behalf.
Bills of exchange are negotiable instruments drawn by the seller (drawer) on

the buyer (drawee) for the value of the goods delivered to him. Such bills are
called trade bills. When trade bills are accepted by commercial banks, they are
called commercial bills. If the seller wishes to give some period for payment, the
bill would be payable at a future date (usance bill). During the currency of the bill,
if the seller is in need of funds, he may approach his bank for discounting the bill.
One of the methods of providing credit to customers by bank is by discounting
commercial bills at a prescribed discount rate. The bank will receive the maturity
proceeds (face value) of discounted bill from the drawee. In the meanwhile, if the
bank is in need of funds, it can rediscount the bill already discounted by it in the
commercial bill rediscount market at the market related rediscount rate. (The RBI
introduced the Bill Market Scheme in 1952 and a new scheme called the Bill
Rediscounting Scheme in November 1970).
Importance of Commercial Bill Market
• Bill financing is easy and convenient sourcing of finance especially for

working capital.
• Level of liquidity in case of commercial bill market is very high.

• Bill financing provides convenient source of shurt term investment for those
who are having additional funds
• Commercial bill is very flexible financial tool.
Limitations of Commercial Bill Market

In India commercial bill market is not fully developed because of the following
short comings.
• Discounted bills were usually not actual bills. They are drawn just for
rai(rng short term finance.
• Lack of strict financial discipline, especially on the part of the borrowers.
88 Financial Markets" Services
• High stamp duty charges payable on commercial bills

• Inadequate credit rating available on commercial bills
• Absence of well developed secondary market for commercial bills
• Lack of government support.
Operators in Commercial Bill Market

RBI has permitted the following operators to operate in commercial market
• All commercial banks
• LlC
• GIC and its subsidiaries
• OFHI
• IRBI
• UTI
• ICICI
• ECGC
• NABARO
• IFCI
• NHB
• SCICI
• lOBI
• TFCI
• Exim bank
• SBI mutual fund
• Can bank mutual fund
• LlC mutual fund
Commercial Bill Market in India

Commercial bill market in India has yet to develop. In many instances bills
presented were not actual bills. This market has to be developed by making it more
Markets 89
popular among business community. The government has setup different committees
to look into the possibilities of developing commercial bill market in India. These
committees includes
• Tandon c,ommittee
• Chore committee
• Chakravarthy committee
• Vaghul committee
Government has also introduced bill market scheme in 1952 and 1970 for
development of commercial bill market in India.
With a view to eliminating movement of papers and facilitating multiple

rediscounting, the RBI introduced an innovative instrument known as "Derivative
Usance Promissory Notes" backed by such eligible commercial bills for required
amounts and usance period (up to 90 days). Government has exempted stamp duty
on derivative usance promissory notes. This has indeed simplified and streamlined
the bill rediscounting by Institutions and made commercial bill an active instrument
in the secondary money market. Rediscounting institutions have also advantages in
that the derivative usance promissory note, being a negotiable instrument issued by
a bank, is good security for investment. It is transferable by endorsement and delivery
and hence is liquid. Thanks to the existence of a secondary market the rediscounting
institution can further discount the bills anytime it wishes prior to the date of maturity.
In the bill rediscounting market, it is possible to acquire bills having balance maturity
period of different days upto 90 days. Bills thus provide a smooth glide from calli
overnight lending to short term lending with security, liquidity and competitive return
on investment. As some banks were using the facility of rediscounting commercial

bills and derivative usance promissory notes for as short a period as one day merely
a substitute for call money, RBI has since restricted such rediscounting for a minimum
period of 1 5 days.
The eligibility criteria prescribed by the Reserve Bank of India for rediscounting
commercial bill inter-alia are that the bill should arise out of genuine commercial
transaction evidencing sale of goods and the maturity date of the bill should not be
more than 90 days from the date of rediscounting.
RBI has widened the entry regulation for Bill Market by selectively allowing,
besides banks and PDs, Co-op Banks, mutual funds and financial institutions.
90 Financial Markets ... Services
DFHI trades in these instruments by rediscounting Derivative Usance Promissory

Notes (DPNs) drawn by commercial banks. DPNs which are sold to investors may
also be purchased by DFHI.
Commercial 8i11 Financing in India, 1950-51 to 2003-04
Inland Bills Foreign Bills Grand Total 7+8
Year P 0 T P 0 T Total Bank %
Credit
1950-51 13 13 547 2.42
1955-60 102 47 149 761 19.54
1960-61 159 49 208 1,320 15.80
1965-66 270 73 343 2,288 14.96
1970-71 753 210 963 4,660 20.67
1975-76 958 894 1,852 316 182 498 2,350 10,877 21.60
1980-81 1,421 860 2,281 628 281 909 3,190 25,371 12.57
1985-86 2,089 1,718 3,807 851 377 1,228 5,035 56,067 8.98
1990-91 3,375 2,336 5,711 2,758 1,851 4,609 10,320 1,16,301 8.87
1993-94 4,049 4,288 8,337 5,448 4,038 9,481 17,818 1,64,418 10.84
1994-95 5,207 6,007 11 ,214 8,179 5,227 13,406 24,620 2,11,560 11.64
1995-96 4,305 9,416 13,721 9,164 6,460 15,624 29,345 2,54,015 11.55
1996-97 4,187 8,605 12,792 7,649 6,337 13,986 26,778 2,78,401 9.62
2001-02 5,031 18,283 23,314 9,089 9,714 18,803 42,117 5,89,723 7.14
2002-03 5,584 20,184 25,768 9,750 11,624 21,374 47,142 7,29,215 6.46
(Source: RBI)
COMMERCIAL PAPERS (CP)

Commercial papers are important sources of short term financing. It is form of
financing consisting of short term unsecured promissory notes issued by firms with a
high credit rating. In India RBI introduced commercial paper in 1990. Commercial
Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP 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.
The introduction of Commercial Paper (CP) in January 1990 as an additional
money market instrument was the first step towards securitisation of commercial
bank's advances into marketable instruments.
Commercial Papers are unsecured debts of corporates. They are issued in the
form of promissory notes, redeemable at par to the holder at maturity. Only corporates
Markets 91
who get an investment grade rating can issue CPs, as per RBI rules. Though CPs are
issued by corporates, they could be good investments if proper caution is exercised.
The market is generally segmented into the PSU CPs, i.e. those issued by public
sector unit and the private sector CPs. CPs issued by top rated corporates are
considered as sound investments
Features
• Commercial papers can be issued by large corporates, financial institutions
etc.
• Commercial papers maturity period varies between 15 days - 1 year.
• Commercial papers sold at discount and redeemed at face value.
• Investors of commercial papers include, insurances companies, banks, MF's
etc. but not individual investors.
• Commercial papers directly sold to investors or through brokers.
• There is no secondary market for commercial papers.
Merits of Commercial Papers

• Alternative sources of financing to bank credit during tight bank credit.
• Cheaper than bank credit in some cases.
• For investors it is a short term safe investment.
Limitations of Commercial Papers

• Not possible to extend the maturity
• Can be issued by companies having good credit rating and financial stability
• Cannot be redeemed until maturity.
Commercial Paper Market in India

Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note. CP, as a privately placed instrument, 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, satellite dealers? and all-India financial
institutions were also permitted to issue CP to enable them to meet their short-term
92 Financial Markets & Services
funding requirements for their operations. Guidelines for issue of CP are presently
governed by various directives issued by t:,e Reserve Bank of India, as amended
from time to time. The guidelines for issue of CP incorporating all the amendments
issued till date is given below for ready reference. The system of satellite dealers has
since been discontinued with effect from June 1, 2002.
In India CP market is regulated by Reserve Bank of India. RBI passes on

regulations from to time to facilitate the smooth functioning of CP market in India.
The various regulations / provisions passed on by RBI are as follows.
(1) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers
(SDs) and all- India financial institutions (Fls) which have been permitted
to raise resources through money market instruments under the umbrella
limit fixed by Reserve Bank of India are eligible to issue CP.
(2) A company shall 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) the working capital (fund-based) limit of the company
from the banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the financing
bank/so
(3) All eligible participants should obtain the credit rating for issuance of
Commercial Paper, from either the Credit Rating Information Services of
India Ltd. (CRISIL) or the Investment Information and Credit =Rating Agency
of India Ltd. (lCRA) or the Credit Analysis and Research Ltd. (CARE) or the
Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) or such other credit
rating agency 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. Further, the participants shall
ensure at the time of issuance of CP that the rating so obtained is current
and has not fallen due for review.
(4) CP can be issued for maturities between a minimum of 15 days and a

maximum upto one year from the date of issue. If the maturity date is a
holiday, the company would be liable to make payment on the immediate
preceding working day.
(5) CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Markets 93
(6) The aggregate amount to be raised by issuance of CP by a corporate should

not exceed the working capital (fund-based) limit sanctioned to it by bank/
banks. Corporates can automatically raise CP to the extent of 50 percent of
working capital limits without prior clearance from the bank/so (The 50 per
cent limit would also be inclusive of any outstanding CP). However,
companies intending to issue CP in excess of 50 per cent of working capital
limits can do so after getting prior clearance from bank/so
(7) Every issue of CP, including renewal, should be treated as a fresh issue.
(8) CP may be issued to and held by individuals, banking companies, other

corporate bodies registered or incorporated in India and unincorporated
bodies, Non-Resident Indians (NRls) and Foreign Institutional Investors (Fils).
However, investment by Fils would be within the 30 per cent limit set for
their investments in debt instruments.
(9) CP can be issued only in a dematerialized form through any of the
depositc.ries approved by and registered with SEBI.CP can be held only in
dematerialized form.
(10) CP will be issued at a discount to face value as may be determined by the

issuer.
(11)· Banks and All-India financial institutions are prohibited from underwriting
or co-accepting issues of Commercial Paper.
CERTIFICATE OF DEPOSITS
A certificate of deposit (CD) is like a loan from an investor to a bank or similar

institution. It is issued by these banking institutions and pays interest. CDs are among
the most widely used money market instrument by investors overall. They are issued
for varying maturities, and earn interest based on this maturity. The most common
CDs include 31-day and 91-day maturities.
A certificate of deposit is a promissory note issued by a bank. It is a time deposit

that restricts holders from withdrawing funds on demand. Although it is still possible
to withdraw the money, this action will often incur a penalty.
For example, let's say that an investor purchase a Rs1 0,000 CD with an interest
rate of 5% compounded annually and a term of one year. At year's end, the CD will
have grown to Rs 10,500 (Rs1 0,000 * 1.05).
94 Financial Markets • Services
Statistics on issue of CP in India
lSSUE OF COMMERCIAL PAPER· BY COMPANIES

i/\lllW!lt ill ~. ~1'(jIe)
Forlr-i9h! ended r~ f11lte of fc,vIIgnl ill'dec! TOIai R3ie·JI FOIUligh! ended T;;!aI Rate ot
~'"'<lU1t :"letts: ~'llour.l Int6l'~ .t.moom lr.lIlIest
Cu;Stal1<Mg ,pel W1\1@ t\Jt:ta:'rtitlQ (r,ef ,:eol) @ o-JI$:a'l!!ir-g Il)6:Cer.t)@
2f)04.O;S 2005·06 2006.(11
Apll I~ ~~9{; L~ 4.66·6.2" ,~';l I~ 1~.213.9() ~.b5· 633 Apnl 15 12.96525 S'l1 ·59!.
3() ,U(l-34& 4.!>G,M() 30 1&~YI9l) ';.~O ·!i.65 ltl 1!>'52!i.l~ tl.3'; ·92&
M:tf 15 :0.32245 4.47·5.95 May 15 In.0779C 5.35 ·5.65 Ma~ l5 11.2r>9.32 632·795
31 ~O ~28 45 4.56· r.OO 31 1!,11!1.9C 540 '0.6. 31 15,112\.51 640·925
Ju.'1e 1!j ~O.3!J~.95 450·6~ J:;ne 15 11.52l.00 M2·oij~ June i& 18.696.51 1).44 ·9.25
Jtj ~G.oog.9!i 4 GO· 6.20 ~ 17.795.00 5.45·651 :lO 19.524.51 4).59 -915
,11.'1 1~ ~O.f3SS.20 463·7.00 J,,1y I~ 18. ISO. 5I 5.~~. 750 July 15 21.237.30 625·830
31 Hl843.20 4.61,500 31 111.349.11 &.~. r!>O 31 nOO2.30 6.50 ,a2~
AugU$! 15 11.C9i 20 4.~,6.50 "'"flu$! 15 19.22671 5.5-3 -1.50 A\I!!U~t 15 22764.30 625·lU~
31 W.S!'f6 3Q 4.60' ".69 31 19.21.'611 !i.4&. r.5O 31 22.854.30 tl6il·900

Sep~ 15 lLC94.80 4.66· 7.00 S~ 15 19,19871 5.5-~-6.56 ~IIW. 15 23.521.30 6..!ij· 817
3() 11.~W30 4.~. 6.50 30 19.694 71 ~.45 - 6.6~ 30 24.419.30 710·925
~ 15 ~O.7:2.1G 495-1.25 0<:t00ei' 15 18,51)1.11 M9,'iOO O:lobef !~ 23.361.ro 72IJ -8.65
31 1{l.256.3V SI0-6.31J 31 18.54&.51 5.63·75O 31 23.031.ro 7.00 - 8.75
~~~ 15 9.193.20 5 lO-\i.2:l tIolieffiOOt 1!\ 17.\ifJ2.S1 S '/5· ,19() ~W 15 23.2rO.m 7.25 -9.m
31) ~{U49.7Ii S40·7OO ~ 11.768.3$ 5.90·679
Oecember 15 ll.l237Q 5.~·6:;t; De-.,ember I~ 168i13~ 0.21· 715
31 :2.100 7Q &.~O,] ~r; 31 li",t&l:j!, Q.20 ~ '/ 15
JalUWy 15 :221530 5.411, 6.a5 J3l1UOIV 15 11.225 '& 6.5~· 7}5
31 123r100 ~,(;. 6 30 31 16,320 8C 6.v5 ·5.&1
February 1'; ~3.322.00 HI 1033 fciwSI'I 1~1 1i.'.~i'3.3~ T.03 S Ij;')
23 13if'>s.% 537·133 2il lS.375.3& 7.l.2· e75

MilRll 1~ 13.2009) 55\)·6.;'6 Mil!t:I1 1~ 128623b 7.15· &95

31 ~3.418 SO 5.2IJ· 7.25 31 lV6735 M9 -9.25
* l;,suea at face v..ce Df CO'''L'l!IlMl!;.

@. Typ;caI el!5ttll,e wSCO\;m la:e!a!l\l&;>91 8fln~....! (lI1 ;;;sues du(:r11 L~e IOttn<ght
(Source: RBI Bulletin, Dec. 2006)
Certificates of Deposit (CDs) is a negotiable money market instrument and issued

in dematerialised form or as a Usance Promissory Note, for funds deposited at a
bank or other eligible financial institution for a specified time period. Guidelines for
issue of CDs are presently governed by various directives issued by the Reserve
Bank of India, as amended from time to time. CDs can be issued by (i) scheduled
Markets 95
commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks
(LABs); and (ij) select all-India Financial Institutions that have been permitted by
RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have
the freedom to issue CDs depending on their requirements. An FI may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other
instruments viz., term money, term deposits, commercial papers and intercorporate
deposits should not exceed 100 per cent of its net owned funds, as per the latest
audited balance sheet.
Features of CDs
• CDs are short term money market instrument issued by banks
• CDs were introduced in 1989
• CDs are marketable and negotiable instruments
• CDs are issued by banks against the deposits kept by individuals, companies
and institutions.
• CDs are issued on discount basis and redeemed at par.
• Discount rate on CDs is market determined.
• Maturity period of CDs is betwee!l 1-3 months and in some cases it can go
upto 1 year.
• Minimum size of one CD is 5 lakhs and multiples of one lakh.
• Banks have to maintain SLR and CRR on the issue price of CDs. No ceiling
on the amount to be issued.
CERTIf'ICATE OF DEPOSIT MARKET IN INDIA

A market that deals in purchase and sale of CDs is called as CD market.CD
market is a part of money market. At present different commercial banks operate in
CD market. The Discout and finance house of india Ltd (DFHI) acts as a regulator
and market maker in case of CD market. CDs are issued by Banks, when the deposit
growth is sluggish and credit demand is high and a tightening trend in call rate is
evident. CDs are generally considered high cost liabilities and banks have recourse
to them only under tight liquidity conditions.
96 Financial Markets 8r. Services
Trends in CD market
Year as at Interest rate % Outstanding Amount
March end (Rs. crore)
1993 12.5 to 16.5 9803

1994 7.0 to 12.2 5571
1995 10 to 15.0 8017
1996 12.0 to 22.3 16316
1997 7.0 to 14.3 12134
1998 7.2 to 26.00 14296
1999 8.0 to 12.50 3717
2000 7.50 to 12.00 1227
2001 5.50 to 11.00 771
2002 5.50 to 10.03 1576
2003 5.00 to 7.10 908
2004 3.87 to 5.16 4461
June end 2004 3.96 to 6.75 5438
Nov. 2004 3.90 to 7.00 5425
(Source: Handbook of Statistics on Indian Economy, RBI, 2003-04.)
Difference Between Certificate of deposit and Time deposit

Certificate of deposit Time deposit! Fixed deposit
Freely negotiable Not negotiable
Issued at discount Not issued at discount
Issued for 1-3 months Can be issued for any perion
Minimum size is Rs 5 lakh No minimum size
Invested Mainly by corporates Anyone can invest
DISCOUNT MARKET
There are different money market instruments like, Commercial papers,

certificate of deposits, Commercial bill, treasury bill, call money ,ete. Effective
working of these money market instruments depends upon discount market in the
financial system. These discount markets provides liquidity to the above discussed
money market instruments. If efficient discounting market is not available in the
economy money market institutions like banks will face problem of liquidity and
will be in a risk of insolvency. In the past central banks of the countries use to help
financial institutions especially banks in their liquidity management by giving them
discounting and refinance facility. Over the period of time discount markets have
developed. as a key player in discount market discount houses came into existence.
Markets 97
These discount houses are organized in forms of companies. Their primary function
is to borrow and lend on the basis of secured instruments. These borrowing and
lending are strictly on short term basis. By borrowing and lending these discount
houses provides liquidity to those institutions which are dealing in money market
instruments. The operations of a discount house include the business of receiving
and utilizing deposits and other funds for investment purposes.
A discount house is a financial organization that purchases BANKERS'

ACCEPTANCES and TRADE ACCEPTANCES, BILLS OF EXCHANGE, and
COMMERCIAL PAPER (short-term IOU, or unsecured money market obligation).
Acceptances, negotiable bills of exchange, and commercial paper are money market
instruments (market where short-term debt securities are issued and traded). The
purpose of the discount house is to purchase the above items, clearing the debt off
the books of the institution holding them.C It is a way for a lending institution to
increase its cash flow, albeit for a smaller return than if the instruments were held
until maturity.
Advantages of Discount Markets
• It facilitates the smooth functioning of money market
• It provides liquidity to financial institutions dealing in money market

instruments.
• It avoids the risk of insolvency to different set of financial institutions
Discount and Finance House of India
One of the major discount house operating in discount market in India is discount
and finance house of India( DFHI). With an objective to strengthen the infrastructure
of fixed income securities market in India, Discount and Finance House of India
(DFHI) was incorporated by Reserve Bank of India (RBI) along with other Public
Sector Banks (PSBs) and All-India Financial Institutions (Fls) under the Companies
Act 1956, on.March 8, 1988. After receiving certificate of commencement of business
on April 25, 1988, the company started its operation with an initial paid up capital
of Rs 100 crore (RBI - Rs 51 crore, PSBs - Rs 33 crore and Fls - Rs 16 crore).
However, in order to broad base the activity of the company, the paid up capital
was subsequently increased to Rs 150 crore in 1989-90 and further to Rs 200 crore
during 1991-92.
98 Financial Markets &. Services
DFHI since its inception has been actively trading in all the money market
instruments (viz. call/notice/term money, commercial bills,·treasury bills, certificate
of deposit and commercial paper) and its business turnover has grown progressively
over the years. With effect from the year 1992-93, DFHI has been authorised to deal
in Dated Government Securities also. After the company was accredited as a Primary
Dealer (PD) in February 1996, its operations have increased significantly particularly
in Treasury Bills and Dated Government Securilies.
Meanwhile, over a period of time RBI took a policy decision to divest their
shareholdings in favor of the existing share holders. Thus State Bank of India (SBI)
became the major shareholder and DFHI became a subsidiary of SBI from 31.03.2003.
SBI Gilts Ltd. a subsidiary of SBI and established in the year 1996 was also an
active participant in the market and one of the top five PDs. As both the companies
were engaged in the same line of business, it was decided to merge SBI Gilts Ltd
with DFHI Ltd in April 2004. Accordingly, from June 2004 the name of the merged
entity was changed to SBI DFHI Ltd.
The shareholding pattern of the Company underwent a change as under:
Institutionc; Percentage of Sharehulding
State Bank (,roup 67.01
Nationalised Banks
All-India Financial Institutions/Private Banks 5.
Asian Development Bank 4.69
100.00
SBI DFHI Ltd, now.., ,>ubsidiary of SBI is the largest PD in the market in terms of
net worth The Company i~ -1 major participant in the wholesale Debt Market both in
the Primarv and Secondary ,~~arket segment
Apart from its head office in Mumbai, the company has operational presence in
six of the major cities viz. Ahmedabad, Bangalore, Chennai, Hyderabad, New Delhi
and Kolkata.
S81 DFHI is one of the leading player in the fixed income securities market and
market maker in Government Securities and Treasury Bills. The company deals with
the following:
Markets 99
• Treasury Bills
• Central Government Dated Securities
• State Government Securities
• PSU Bonds
• Inter-Corporate Deposits
• Commercial Paper
• Interest Rate Swaps
Besides, participation in Repo Market of GOI Securities and Treasury Bills as

well as the participation.in the Inter-Bank Call/Notice/Term Money market, both as
a borrower and as a lender is possible through the company.
SBI DFHI also provides the Constituent Subsidiary General Ledger (CSGL)
account facility which enables even those entities which otherwise do not have an
SGL Account facility with the RBI to reap the full benefits of investing in Government
Securities. On purchase of Treasury Bills/Government Securities, they will be credited
to the CSGL arcount, whereas on sale they will be debited from the CSGL account.
Moreover, SBI DFHI will receive coupon payments/redemption proceeds from RBI
and pass on to the CSGL account holder as and when such payments fall due.
Advantages in Dealing with S6I DF"I

• Promoted as a subsidiary by Reserve Bank of India and at present a
subsidiary of State Bank of India, the largest Commercial Bank in India.
Hence, enjoys an excellent credit rating in the market.
• Since there is no brokerage or any other hidden charges price transparency

is assured in our transactions.
• They take care of the entire procedural formalities involved in securities

purchase / sales to the best satisfaction of our customers.
• Good branch network for easy interface across the country.

SBI Gilts Ltd has merged with Discount and Finance House of India (DFHI) Ltd,
during the year. and the combined entity is proposed to be renamed as SBI DFHI
Ltd. The combined entity has completed the bidding commitments and achieved
100 Financial Markets a. Services
the success ratio as per the undertakings given individually to RBI for the financial
year 2003-04. After netting out the transactions with each other, the total outright
(Non Repo) combined turnover of government securities and treasury bills during
the period stood at Rs.79,172.94 crore, out of which the turnover in treasury bills
amounted to Rs.14,950.30 crore.
The combined entity posted a post-tax profit of Rs.17 4.09 crore (PBT at Rs.276.59
crore) for the year 2003-04 and paid a dividend of 30%. The Bank holds 57% of
their share capital.
Securities Trading Corporation of India Ltd. (STCI)

Securities Trading Corporation of India Ltd, is one of the leading Primary Dealers
in the country, promoted by RBI, along with major financial institutions and Banks
in 1999 with the objectives of widening the gilt and other debt security market
through development of a vibrant secondary market. Bank of India with 29.95%
holding is the single largest stakeholder in the Rs.500 crore paid-up capital of STCI.
The company is an associate company of the Bank in terms of Accounting Standards
21 (AS-21) of the Institute of Chartered Accountants of India.
STCI is professionally managed and has on its Board persons of eminence from
the fields of banking, finance and academic. Bank is represented on the Bond by
two of the General Managers. 'STCI has a consistent track record of dividend pay-
out. During 2003-04, the company earned a net profit of Rs.193.90 crore. The
company paid 20% dividend for the year.
FINANCIAL GUARANTEE MARKET

In financial market lender always faces a risk or default from borrowers or

debtors. This is called as lenders risk. The lenders are protected from this risk by the
government in many countries including India.
Guarantee is a form of security demanded by the creditors. Usually, borrower

finds the guarantor. In many cases, government or private operators set ups guarantee
corporations and helps the borrower in their job. Borrower pays the commission to
such guarantee organisations.
Markets 101
Features or Financial Guarantee

1. Financial guarantee is given by guarantee organisations to the lender. Many
cases individuals also can give guarantee.
2. Guarantee Organisations are approached by the borrowers to get the
guarantee.
3. Guarantee organisation or guarantor must be prestigious in the view of

creditor.
4. Borrower has to pay commission or brokerage to the guarantor to get the
guarantee.
5. Guarantee can be given either by one guarantor or more than one jointly
or by a organisation.
6. Purpose of getting guarantee is to avoid the risk of default by borrower.
7. Guarantee may be oral or written, but generally it is written.
Types of Financial Guarantee

Financial guarantee can be:
1. Specific guarantee: Here guarantee is given only for a single transaction.
2. Consigning guarantee: It covers a series of transactions between borrwer

and lender.
3. Secured guarantee: Here guarantee is balled up by tangible assets or the

guarantor.
4. Naked guarantee: In this case, tangible assets will not be available and
guarantee is given by guarantor on his personal ground.
Suppliers of Providers or Guarantee

1. Personal guarantee: Its an unorganised and very old form of guarantee. Here
an individual on his own account gives guarantee to a loan or such transactions. But
there is a sharp decline in using the personal guarantee.
2. Guarangee by Financial Institutions: Many financial institutions provides

guarantee. In India financial guarantee market is well developed. Here many
102 Financial Markets & Services
institutions are actively taking part in the financial guarantee market. Such financial
institutions are:
(a) More or less all commercial banks.
(b) Insurance copaies.
(c) Other financial institutions such as IFC, IClCI, SFCs, SIDCs etc.
3. Guarantee by Government: In many case governments both Central and

State governments provides guarantee. Centra! government usually gives guarantee
through RBI and State Governments do it through their /SFCs
4. Specialised Institutions: Government has set uyp specialised guarantee

institutions to provide Finandl guarantee. These institutions includes:
(a) Credit guarantee organisations (CGO)

(b) Credit Guarantee Corporation (CGC)
(c) Export Credit Guarantee Corporations (ECGC)
Financial Guarantee Market in India

With the advent of liberalisation, there was a rapid increase in number and
vaue or financial transactions. These development necessitated the need for having
efficient financial guarantee market. In India financial guarantee market is well
developed with many players both from public and private sector activly taking part
in it. Government has set up some specialised institutions for providing financial
guarantee.
EXPORT CREDIT GUARANTEE COKPTION OF INDIA (ECGC)

The Government of India set up the Export Risks Insurance Corporation (ERIC)
in July 1957 in order to provide export credit insurance support to Indian exporters.
It was transformed into Export Credit & Guarantee Corporation Limited (ECGC) in
1964. To bring the Indian identity into sharper focus, the Corporation's name was
once again changed to the present Export Credit Guarantee Corporation of India
Limited in 1983. ECGC is a company wholly owned by the Government of India. It
functions under the administrative control of the Ministry of Commerce and is
managed by a Board of Directors representing Government, Banking, Insurance,
Trade, Industry, etc.
Markets 103
CREDIT GUARANTEE CORPORATION OF INDIA LTD. (CGCI)

The Reserve Bank of India promoted a public limited company on January 14,
1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The main thrust
of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation
of India Ltd., was aimed at encouraging the commercial banks to cater to the credit
needs of the hitherto neglected sectors, particularly the weaker sections ofthe society
engaged in non-industrial activities, by providing guarantee cover to the loans and
advances granted by the credit institutions to small and needy borrowers covered
under the priority sector.
With a view to integrating the functions of deposit insurance and credit

guarantee, the above two organizations (DIC & CGCI) were merged and the present
Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence
on July'15, 1978. Consequently, the title of Deposit Insurance Act, 1961 was changed
to 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961 .
Effective from Apri I 1, 1981, the Corporation extended its guarantee support to
credit granted to small scale industries also, after the cancellation of the Government
of India's credit guarantee scheme. With effect frum April'l, 1989, guarantee cover
was extended to the entire priority sector advances, as per the definition of the
Reserve Bank of India. However, effective from April 1, 1995, all housing loans
have been excluded from the purview of guarantee cover by the Corporation.
GOVERNMENT SECURITIES MARKET

Government securities or gilt edged securities arc those financial instruments
that are issued by central, state or semi government l"ldertakings including local
authorities. Market for government securities indicates strength of the economy. As

an agent of the Government, the Reserve Bank of India. manages and services these
securities through its public debt offices located in various places. These are securities
issued by the state governments. The issues ~re also managed and serviced by the
Reserve Bank of India.
Apart from purchasing government sect.;rities from the Reserve Bank of India
through its auctions/sales, all types of government paper can be purchased from the
secondary market. Accredited Primary Dealers and Satellite Dealers also purchase
and sell securities.
104 Financial Markets It Services
Instruments Included in Government Securities

The basic government securities includes treasury bill in money market and
different bonds as a part of capital market. Different types of bonds issued by
government is as follows
Zero Coupon Bonds

Bonds issued at discount and repaid at face value. The difference between the
issue price and the redemption price represents the return to the investor. No periodic
interest payment is made. Zero Coupon Bonds bear no reinvestment risk but they
are prone to interest rate risk making their prices highly volatile. The buyer of zero
coupon bonds receives one and only one payment, at maturity of the bond. In contrast,
coupon bonds make a series of periodic coupon payments to the buyer as well as
paying face value at maturity. Zero Coupon Bonds on auction basis was introduced
in January 1994 by Government of India.
Floating Rate Bond

Floating Rate Bond is an instrument whose periodic interest or dividend r'ates
are indexed to some reference index such as Treasury security etc. These instruments
give a variable rate, a characteristic that allows both issuer and investor to share the
risk inherent in changing interest rates. The volatility of interest rates have led to
creation of these instruments designed to offer some protection to the players. Thus,
Floating Rate Bonds enable investors to take advantage of movements in interest
rates. Floating Rate Bonds were introduced by Government of India on September
29, 1995 linking it to the 364 day Treasury Bill rate.
Tap Stock
A gilt edged security from an issue that has not been fully subscribed and is
released into the market slowly when its market price reaches predetermined levels.
Short taps are short dated stocks and long taps are long dated stocks. These Stocks
were introduced by Government of India on July 29, 1994.
Partly Paid Stock

An innovative instrument was (Government stock auctioned on November 15,
1994) for which the payment is made in instalments. It is designed for institutions
with regular flow of investible resources requiring regular investment outlets. The
instrument has attracted good market response and is being traded actively.
Markets 105
Capital Indexed Bonds

These bonds were floated on December 29, 1997 on tap basis. The tap was
kept open upto 28th January 1998 and an amount of Rs.704.52 crore was mobilised.
These bonds are of four year maturity and carry a coupon rate of 6 per cent. The
objective of the capital indexed bonds was to provide a complete hedge against
inflation for the principal amount of the investment.
Government Securities Market in India

The Indian government securities market has been transformed in the last ten
years. A snapshot of the market would reveal that between 1992 and 2003, the
outstanding stock of central government securities has increased nine-fold to Rs.6,739
billion. As a proportion of GOP, it has doubled from 14.7 per cent to 27.3 per cent.
The average maturity of securities issued during the year has elongated to 15 years
in 2003 from around 6 years in 1996. The weighted average cost of securities
issued during the year first rose from 11.8 per cent in 1992 to 13.8 per cent in 1996
and then fell to 7.3 per cent in 2003. Turnover has increased to over 200 per cent of
GOP in 2003.
1"2 1996 1001 1.OJ

()uu1I:!urlin,. .t"....k (t~ in hiUioltj 1~.'-} t:i7~ S.16' 61.19
{)u4:<I:al\Jiag .."ok 011 roti", of (il)P(.rcrl:ut) 14 .~ 1•. :0 11, .... 27.29
Tllrnu\·...... : (il>I' t.rer "'""'"') :14.11 IS:.6" 202 .X~
S:ro
Aw~~ lUatarity o)flh~ S«Uritic¥lSA""d <I_nny. tI~ ~ear (in V.aN:'
Wllliglll~J :aVCf'1gt:.:u.turlhe ~uriljctio i" ..,u~d Juri., II~ )'ur (1·~":lIlnl'
MinilQutD ....<1 nlllxinUlIlIl11:lturiti,,,,,, (of "'ltd: ilCMWd Jurin~ th" y~ (in "i.:.an)
11.1S
N .•~..
1).11
1-1 0
1~.90
'
5-IS
.. IS.lI
?.:w
'·.10
.tI) slIare in lite tum(lt..er
A. Itrim~ ftuarht ;0.041.- 6HW.
8. ~ wnd:.rym:U"h.t 2:»4 21.12
.~8 15_'23
.. C(Jl : CI--..tinS Co)tpo1'llti.,u ~f India limil~d.
Note : Tummra;~ tu t()t;ll 0.)( o>urrigbl. aad Npn tllm"\"~r . ()ulriiJhll.Ulu . .w~r l,Iud Nr~) lU,.OV~Itr.e 'III Jc:ul::awd:l\ tWK-cnnd t'~.tr· timt:A ll.e: tr311~tw..~ \-c.4 .. mcN'ApU"tivdy
Sane" t I. RlU. p",:.,(ln (oa <:urn:tlI:)' nod f'in~a~e . ·varicu,-s jMUC".4

~. Rtu (:!()( ('\ J
106 Financial Markets. Services
Reforms in G-Security Market
Year Rt'furm IRltl:dcd R~m:l"ks
JUlie Commenced audioll ('If Central To indu;;etmnsp~nmcy into flricc discovery h;IS becom~ very fine
(C)92 Government Securities <It m:lrkCI the proctlss (l\'t'r il period of time.
dctcmlim:d ciltes f,)r the li"'t lime
January 'II day Treasury Bills oll~rlld through To IJlfllr an in~rrument for Em.:rgcd :IS a vcry useful in~trumellt
1993 auclion. al market detemlin~d rat(l~ nUllmging the liquillity ,\nd now forms a benchmark at Ih~
~hort end 1)1' the yield CUl've.
J.Uluary Issued Zen. C(lUPOII Bvlld for the lir~t T (> ~dd n~w in~ITuments and STet is now a prim.try dealcr (PD).
1994 lime. Sceunlic$ Tmding COlpomtion ()f intcrm;:diaric~ STn lIud I 7 PI>.! Iut"c tl«OIllC importllnt
ludia (STell commenced '~rcmli()n~ inlenncdiarics in th.: <:i-Sec IIlllrkct.
AugU$1 A his toric Hgrccrncnl was signed To pave way for aholition of l1a>:ilitalco furthcr rdorm~ iu the
(')94 h ...'twecn RBI lind tht' gm'crnntenl: .lll adho.; treasury bill.s mark.:t.
th" net lS~ue uf adhoc Ir'::a,ury b ;ll~
M'lr.:h Guiddin,,:s and proc.edur<!, I'M To stT<lll,.:thell Ih.: mark.:i I'D system h.b <'volved .IS an important
11)95 t,nlistmefll of Primacy O.:"kr. were mk"'IlI<,J,"ti,)1l ~(,'gmcn t vf G-sC'(.· lnark~t.
is~u.:d
July Ikli~c,v-wrsus-I'"vmt.'nl (DVI', In G- T v r.:cluc~ ."ttlenlenl risk We ar.: ·n(l"'· gwdu3ting to 0\'1'-111.
1995 sec~ W~$ inlrodu(.:~1
SCpICm~tf Flo,ltlUg R:lle Bonds (FRBs) was Toacld moremstrumcnts Flo:lt....r~ :lrc Ih~\Ii bccoming p'>ruilir. 15-
(995 mtrmh,ccd 2!) per cent of frcsh GO!. bomnvillg is
now through fRBs.
January Tt,chni",,1 Ad\~sllry Connnitt.x: (TAO To RBI on Plays a great role in de\ eloping Ih.: o-
1997 was cOIl:>titutcd develCll'in{! G -s~c market see market and .$i~nifjes Ihe
consullative and collabllTativll "pprooch
(.f RBI in illlplcnlt.'niing refonn~.
Mllrch Hi$torlcal lIg.n:emcllt biltW':CII To disconlllluc ant,)mHtic ltnl'm~lld mlllSI'ateIlCY .md priCing <IS
1997 Gov.:rnm .:nt and RBI tl), inter alia , rnonetisation al~(. Ituwnomy ill nl(lnetary tw1i,y
diM:ontllluc adhoc T-Bills o\aking ' _
April FIMMDA w..~ ~~·t.lhlished Self regulation Improvcd proctices.

I'N?
Repo was permitted in all (j·~('cs to To ullt'lwn the repo n1llrket Rt'po market has been dllvdoping.
SG!. 1"''' lmldc.... s and 10 ~hifi th.:: IIH)IIt'y
market fmm >:ull w

colllllcralis.:d "'1'0 mark;:t
CIlJltri....
Markets 107
YCllr Refurm IlIltlllted Objrctln~ Remarks

July Fils wl.'re permitted to invest in G-~ecs To broadolJl the Jl1arket. FII hav" bcoomc an impomml fllay¢r
1997 in thc markc:i today. particularly in 1',
Bill Sil!;lncnt.
Ilcccnrth:r Clpiwl In(kx<:d BilnJ~ were is.~\lcd To help inv':~lol":l hedge tbe Effort~ being made to fc"ilali~e Ihi"
1997 I'DAI was formed ri~k p...tdtl.:t
April Sak: of s,,'Curitie~ all(>lted In primalY Tc- iml)l"OVC ~e(:ondary Thi .~ h .. ~ 1I1so helped manage the
2i)(iO Issues c:>n Ihll ,amol day mark",t overnight ri.sk
June Inlwduclioll of L.iquidity Adju~lmcnt To m<lna;.:c: ,hoft lerm Emerged a. an unl'ortant 1001
2000 Fa"iItIY (LAF) Ii<iuidii~' Illi~-miltchrs
Fcbnwry N.:gotillted Dealing System INDS; Foe impro"cd tnldin!:"! and C .... llIl'ihutc:d t.... ihc instituli .... nal
200,2 (r'h;u.e I) c-pmllionalise<i ~"t II clIlc:n t :Gu aT a II I eed framewurk for the n.arkC:1 : rcdu.:cd
Clllaring CorpMation of Indw Ltd. S.:Ulcll1cl1I by a eel'. s.:UicmO!llt ri~k
i! (CelLi was (>IX'r;ni('1l3Ii.ed
' May Compulsory liol,ling ,)f G-'l:" , iii The pWgf("~~ (If dolmalffiali~aliiln is
21102 Jemal fom. by RBI r"'gulaied ;;'milte, [leiu); monilored
II.lUl1ol 1'0< were br,Hlght ·under Ih~ BFS FN IIltegnu.:<i slIp.,,'Visioll (If ThO! positi(lll is bClII!,! f¢porlcd
2(")2 jurisdictIOn Ilmek~1 pcriucli.:ally fC> BfS
July G-~ccs\\'ith call and rill uplum W;IS T.) ofl'O!f v:.riilty (If Product llIay 1"' 1'11 il1lprowlIlcnl
21102 mirodun'J instrulIWUL'
October Trade data or NDS is being made To improve t!1uu,parel\l;y B.:.i<les. the mca~ ur.; is helping th.:
2(l02 a\,;lIl.1hk ()II Rill \\'eb.~lh) ~mall InVi.'Stors a~ wdl
Jaml<lry To facilitate e;lsiilf :1(,Col~8 This hilS 1101 tllen off very w.:ll. !]Torts
2003 and ",·ider p<lfi i"ipalion are (In 1(' improve the POSilioll
f'dlruary EligibililY to parIlClpa(~ III tho: rcpo To widen 111(' market Efforts arc on 10 fUriher widen and
20t)3 market wa~ 1I'tlen<ied to notl-t>llnk, dC':pi.>J1 Ih.: repo llIarkcl. EXlenSlon to
c('rporale:> i~ beillg o.amincd.
Jum, InWrt.'St Rat<l Dcriv,ltivcs dRDI 1I'1W To f:l{'iltwtll (he markolt Trilding III IRD~ is, c"lwt:l~J 10 ;;el ••
200:1 hc:clI inlTOdun:d hedg.: thc: ir market ri~k 1xlQ;.1 "ner SEBIs ll\oditic:tI guicldinc:~
isslled il\ January, :!004.
July O ..Wernmllnl Dd,t Buy-B:lck ~~hel\1c To n:du"l' IIlh!rcsl hurdcn of T,.I(II of R~ . 144 bllli(ln (lac.: vah.e)
200J was succ.:sslully irupkm('lltcd goV('rnm(' ,lI and f(1 h;.:lp ,c.:urili<:. weee boughl bll.:k by Ih.:
m<trk"'1 partlcip,UlIs (lfil,)aJ ~'.lvernrl·'h~nll\nd i"''\tI~d liqUid ~e"::lJrith~:'lo
llim illiqllid 'i..'t:lIlili"" for .:qlll\·ulcnr amount ill markC:1 yidd.
r-Ian;h RlGS sy.~tcrn trial cun Real lim,- <)ullllc. i:Jfg<l RUllniug ~uc('cssfully
21)1.14 Vall": inln-bank paymenl
SOlin,,': I. DFlH i2CK.K.II

Jnd , .. nkmCIIls I
2. Re,cr\.: Bank of InJ",.
108 Financial Markets. Services
Outstanding Stock of Securities of the Centre and State Government

(R•. billion)
Y~ar Centre States
1991 704 156
1992 769 190
1993 817 236
1994 1106 261
1995 1375 312
1996 1695 379
1997 1929 436
1998 2490 508
1999 3116 615
2000 3819 739
2001 4537 868
2002 5363 1040-
2003 6739 1331
So8ru : Reserve Bank of India.
QUESTIONS
Section A - 2 Marks eacb

1. What is a call money market?
2. What are the different types of treasury bill.
3. What are the types' of financial guarantee avai~able?
4. What is financial guarantee?
5. What is a Government security?

6. What are floating rate bonds?
7. What are zero coupon bonds?
Section B - 5 Marks eacb

1. Define T-Bill market? What are its features?
2. What is commercial papers? What are its merits and de-merits?
3. Differenifate between certificate of deposit and time deposit.
4. Explain the functioning of ECGC.
Markets 109
Section C - 15 Narks each

1. What are cqmmercial Bills? Explain its feature? Who are the operators involved
in this market?
2. What is a CD? Explain its features and its trends in India.
3. Explain the working of discount and finance house of India.
000

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CHAPTER-3

A financial market is an integral part of financial system of any economy. A

Classification of Financial Market

CALL MONEY MARKET

Features of Call ~oney ~arket

AVERAGE DAILY TURNOVER IN CAlL MONEY MARKET

i:!~<lWI~ le:'!ding. 6o;.0\1'''":!l' lendil1g$ l6lldl!lg&

A~t 5, l'.lIl5 6,219 804 ~G15 21 312 11.181

July 7. 2006 9,216 10,9sa 1742 32 22.039

Alen Range 01 Rates ~lgMea Average R61es

0cmbeI 3. 2006 560 . 7.50 500 . 750 656 6.56

'< 2006 5.75 . 730 5.15 . 730 S.92 692

November 8, 2000 5.1~ • 7 &.; 5."15 • r.O~ 681 6.61

TREASURY BILL MARKET.

The salient features of the T-Bills are:

• They are issued at a discount to face value.

• The bills are eligible securities for SLR purposes.

Types of Treasury Bills

Treasury bills (T-bills) offer short-term investment opportunities, generally up to

Amount of Investment in T-bills

Type of Day of Day of

91-day Friday Following Saturday

Turnover in treasury bill in India

~ 3.34.695.16 2C-51.15 5.2';}B 12 - l1!i2C.65 5.568!O

Oc!oI:e' 1.26.509.78 8.5'5~ 2€•. lSI.56 - 17,07U2 189.37

Outstanding value of Government treasury bill

fl.I.1reb 311 La&t

Ma.31 1m - - 22( - 827 - - - 249 - 200

t.\a', aI, 2003 - - - - 642 1 - 1100 - 'f1lU - 700

JaIl, 2004 - - - - 2,624 - 200 - 2.'129 - -

M't( 2005 - - - - 22.14{l - Hac - l,8t\S - 32

COMMERCIAL BILL MARKET

Bills of exchange are negotiable instruments drawn by the seller (drawer) on

Meaning of Bills of Exchange

• A bill of exchange must be in writing and not oral.

• It is an order to make payment.

• The order to make payment is unconditional.

• The maker of the bi II of exchange must sign it.

• The bill of exchange must be payable to a certain person. The amount

• It must be stamped as per the requirement of law.

According to the Negotiable Instruments Act, a bill of exchange is generally

Bills of exchange are negotiable instruments drawn by the seller (drawer) on

Importance of Commercial Bill Market

• Bill financing is easy and convenient sourcing of finance especially for

• Level of liquidity in case of commercial bill market is very high.

who are having additional funds

• Commercial bill is very flexible financial tool.

Limitations of Commercial Bill Market

• Lack of strict financial discipline, especially on the part of the borrowers.

• High stamp duty charges payable on commercial bills

Operators in Commercial Bill Market

• GIC and its subsidiaries

• SBI mutual fund

• Can bank mutual fund

• LlC mutual fund

Commercial Bill Market in India

With a view to eliminating movement of papers and facilitating multiple

on investment. As some banks were using the facility of rediscounting commercial

DFHI trades in these instruments by rediscounting Derivative Usance Promissory

COMMERCIAL PAPERS (CP)

Merits of Commercial Papers

Limitations of Commercial Papers

Commercial Paper Market in India

In India CP market is regulated by Reserve Bank of India. RBI passes on