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Niroopa Rani Dharm Pal Yadav E Sonia PGDBM 2010 - 12

Financial System

An institutional framework existing in a country to enable financial transactions Three main parts

Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance companies, etc.) Financial markets (money market, capital market, forex market, etc.)

Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)

Financial assets/instruments

Enable channelising funds from surplus units to deficit units There are instruments for savers such as deposits, equities, mutual fund units, etc. There are instruments for borrowers such as loans, overdrafts, etc. Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc. Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government

Financial Institutions

Includes institutions and mechanisms which


Affect generation of savings by the community Mobilisation of savings Effective distribution of savings

Institutions are banks, insurance companies, mutual funds- promote/mobilise savings Individual investors, industrial and trading companies- borrowers

Financial Markets

Money Market- for short-term funds (less than a year)


Organised (Banks) Unorganised (money lenders, chit funds, etc.)

Capital Market- for long-term funds


Primary Issues Market Stock Market Bond Market

Organised Money Market


Call money market Bill Market


Treasury bills Commercial bills


Bank loans (short-term) Organised money market comprises RBI, banks (commercial and co-operative)

Purpose of the money market

Banks borrow in the money market to:


Fill the gaps or temporary mismatch of funds To meet the CRR and SLR mandatory requirements as stipulated by the central bank To meet sudden demand for funds arising out of large outflows (like advance tax payments)

Call money market serves the role of equilibrating the short-term liquidity position of the banks


Money Market consists of a number of sub-markets which collectively constitute the money market. They are,  Call Money Market  Commercial bills market or discount market  Acceptance market  Treasury bill market

What is call money market?

Is an integral part of the Indian money market where dayto-day surplus funds (mostly of banks) are traded. Money lent for one day is called call money; for 1 - 15 days is called notice money for > 15 days is term money


The borrowing is exclusively limited to banks, who are temporarily short of funds.

Call money market (2)

Call loans are generally made on a clean basis- i.e. no collateral is required

The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds

The call market helps banks economise their cash and yet improve their liquidity


It is a highly competitive and sensitive market It acts as a good indicator of the liquidity position


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 Foreign banks/private sector banks account for the balance 20%.


The Sukhumoy Chakravarty Committee

The call money market for India was first recommended by the Sukhumoy Chakravarty Committee, was set up in 1982 to review the working of the monetary system. They felt that allowing additional non-bank participants into the call market would not dilute the strength of monetary regulation by the RBI, as resources from non-bank participants do not represent any additional resource for the system as a whole, and their participation in call money market would only imply a redistribution of existing resources from one participant to another. In view of this, the Chakravarty Committee recommended that additional nonbank participants may be allowed to participate in call money market

The Vaghul Committee Report

The Vaghul Committee (1990), while recommending the introduction of a number of money market instruments to broaden and deepen the money market, recommended that the call markets should be restricted to banks. The other participants could choose from the new money market instruments, for their short -term requirements. One of the reasons the committee ascribed to keeping the call markets as pure inter-bank markets was the distortions that would arise in an environment where deposit rates were regulated, while call rates were market determined

The Narasimham Committee II Report

The Narasimham Committee II (1998) also recommended that call money market in India, like in most other developed markets, should be strictly restricted to banks and primary dealers. Since non- bank participants are not subject to reserve requirements, the Committee felt that such participants should use the other money market instruments, and move out of the call markets


Affected by liquidity in the market One of the segments of the money market No physical address Interest rates undergo a change on a day to day basis RBI has prescribed prudential limits for banks Transactions not secured by any collateral

Call Money Market Participants

Who can both borrow and lend in the market


RBI (through LAF), banks and primary dealers

Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders side These were phased out and call money market is now a pure inter-bank market (since August 2005)


From May 1, 1989, the interest rates in the call and the notice money market have been market determined. Interest rates 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.


This is the interest rate charged by banks to brokers for money used to finance investors' margin loans. Eligible participants are free to decide on interest rates in call money market. This is the benchmark rate for what investors pay to buy securities on margin. A service charge or markup is typically added by the broker.


Scheduled commercial banks: On a fortnightly average basis, borrowing outstanding should not exceed 100 per cent of capital funds. However, banks are allowed to borrow a maximum of 125 % of their capital funds on any day, during a fortnight. Co-Operative Banks: Banks on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year Primary Dealers: PDs are allowed to borrow, on average in a reporting fortnight, up to 200 per cent of their net owned funds (NOF) as at end-March of the previous financial year.



Scheduled Commercial Banks: On a fortnightly average basis, lending outstanding should not exceed 25% of their capital funds; however, banks are allowed to lend a maximum of 50 % of their capital funds on any day, during a fortnight Co-Operative Banks: No Limits Primary Dealers: PDs are allowed to lend in call money market, on average in a reporting fortnight, up to 25 per cent of their NOF Non-bank institutions are not permitted in the call money market with effect from August 6, 2005.


Borrowers and lenders contact each other over telephone. The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favour of the borrower. The borrower in turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the duly discharged receipt.

Operation in call market CONTD.

The deal can be directly negotiated by routing it through the Discount and Finance House of India (DFHI). The borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The reverse takes place in the case of lendings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement.

Call loans can be renewed upto a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower.


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


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. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.

There must be not only an outlet for the employment of funds temporarily idle, but a large volume of call and short-time money is essential to the successful and economical conduct of business. It is particularly essential to the international and domestic commercial business, but the diversion of the use of the major portion of such money to the securities markets is not in accordance with sound banking principles. In India call loans on securities lack the essential quality of liquidity required for quick and certain realization, and that this fact has now been more generally taken into consideration by our lenders. But the safe and successful divorce in this country of the use of call money from dependence upon investment securities as a basis requires careful study in order that safe and adequate methods may be substituted for the present methods of the securities market. Call money market serves the role of equilibrating the short-term liquidity position of the banks


Most active segment of money market Day to day imbalances in the funds position of commercial scheduled banks is eased out Graduated into a broad and vibrant institution Its a part of the organized money market


The simple logic behind a pure interbank call money market is that it allows the central bank more flexibility in managing liquidity and short-term interest rates in the banking system


Deals in the call/notice money market can be done up to 5.00 pm on weekdays and 2.30 pm on Saturdays or as specified by RBI from time to time


All dealings do not require separate reporting It is mandatory for all Negotiated Dealing System (NDS) members to report their deals on NDS. Deals should be reported within 15 minutes on NDS, irrespective of the size of the deal or whether the counterparty is a member of the NDS or not. In case there is repeated non-reporting of deals by an NDS member, it will be considered whether non-reported deals by that member should be treated as invalid. The reporting time on NDS is upto 5.00 pm on weekdays and 2.30 pm on Saturdays or as decided by RBI from time to time.

Reporting requirements CONTD

With the stabilization of reporting of call money transactions over NDS as also to reduce reporting burden, the practice of reporting of call money transactions by fax has been discontinued. Deals between non-NDS members will continue to be reported to the Financial Markets Department (FMD) of RBI by fax as hitherto. In case the situation so warrants, Reserve Bank may call for information in respect of money market transactions of eligible participants by fax


To commercial banks to meet large payments, large remittances, to maintain liquidity with the RBI and so on. To the stock brokers and speculators to deal in stock exchanges and bullion markets To the bill market for meeting matured bills. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. To individuals of very high status for trade purposes to save interest on O.D. or cash credit


High Liquidity High Profitability Maintenance of SLR Safe and cheap Assistance to central bank operations


Uneven Development Lack of Integration Volatility in Call Money rates


The withdrawal of non-bank entities from the inter-bank call-money market is linked to the improvement of settlement systems. Any time-bound plan for the evolution of a pure inter-bank call/notice money market would be ineffective till the basic issue of settlements is addressed.


Helps Bank to manage short-term deficit or surplus of money Provides funds that can be used to conduct transactions between banks, or with other money market dealers The call money loan essentially works in the same manner as a day to day loan Crosses international lines, with funding opportunities located around the world



The money market is a market for short-term financial assets that are close substitutes of money. It is liquid and can be turned over quickly at low cost. Provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis

Insights CONTD.

Banks borrow in this money market for the following propose. To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks