FINANCIAL

INSTITUTION
AND
MARKETS
Dr. Darshan Bankwala
ASSISTANT PROFESSOR
DRB & NIM COLLEGE
 A. TREASURY BILL MARKET (T-BILLS)

T-Bills are the short-term money market

instruments issued by the Central Bank of
India (RBI in India) on behalf of the
government to curb temporary liquidity
shortfalls.
 TYPES OF T-BILLS

91 Days
182 Days
364 Days
*issued in multiples of 25000 Rs.
 Ordinary Bill – Issued by
Ad hoc Bill – Issued in
Other Types RBI to fulfill the short-
term need for
favour of RBI (Special
case 1937)
supplementary finance.
Features of Treasury Bills

1. Form
2. Minimum bid amount
3. Issue Price
4. Eligibility
5. Highly Liquid
6. Auction Method
7. Issued by
8. Zero Risk
9. Day Count
 Importance of Treasury Bills

Ideal short-term
Safety Liquidity
investment

Ideal fund Statutory liquidity Source of short-term

management requirement funds

Non-inflationary
Hedging facility
monetary tool
 Drawbacks of Treasury Bills

Poor Yield

Absence of competitive bids

Absence of active trading

B. COMMERCIAL PAPER

Commercial paper is an unsecured, short-

period debt tool issued by a company, usually
for finance and inventories and temporary
liabilities. The maturities in this paper do not
last longer than 270 days. These papers are like
a promissory note allotted at a huge cost and
exchangeable between the All-India Financial
Institutions (FIs) and Primary Dealers (PDs).
 They are unsecured debts of
corporates and are issued in the
form of promissory notes,
redeemable at par to the holder at
maturity.
Attracts issuance stamp duty in
primary issue
Its held in Demat form
Bank and FI’s are prohibited from
issuance and underwriting of CP’s.
Only corporates who get an
It is issued at a discount to face
investment grade rating can issue
value
CPs, as per RBI rules.
Has to be mandatorily rated by
It is issued as per RBI guidelines
one of the credit rating agencies
CP can be issued in
denominations of Rs. 5 lakh or
multiples thereof. The amount Issued at discount to face value as
invested by a single investor may be determined by the issuer.
should not be less than Rs. 5
lakh (face value).
Can be issued for a maturity of a
minimum of 15 days and a
maximum of up to one year
from the date of issue.
 In India, commercial paper is a short-term unsecured
Who can issue
promissory note issued by the Primary Dealers (PDs)
commercial paper
? and the All-India Financial Institutions (FIs) for a
short period of 90 days to 364 days.
 • It is a short-term money market tool, including
a promissory note and a set maturity.

• It acts as an evidence certificate of unsecured debt.

• It is subscribed at a discount rate and can be issued in

Features of an interest-bearing application.
commercial paper
• The issuer guarantees the buyer to pay a fixed amount
in the future in terms of liquid cash and no assets.

• A company can directly issue the paper to investors, or

it can be done through banks/dealer banks.
 Advantages of Commercial Paper

Easy to raise long

Simplicity Flexibility
term capital

High returns Movement of funds

C. Call/Notice Money Market

Most banks have to maintain some minimum cash

balance as per the instructions of the RBI, known as
the cash reserve ratio (CRR). This ratio changes
from time to time as per the liquidity in the
economy. So banks sometimes borrow money from
each other for a short duration to maintain their
CRR. This is known as the call money market. The
interest rate on such call money is known as the call
rate.
 The call money market
These loans are repayable
refers to the market for
on demand at the option of
extremely short period
either the lender or the
loans; say one day to
borrower.
fourteen days.

The money that is lent for If it exceeds one day but

Meaning of Call one day in this market is less than 15 days it is
known as “Call Money”, referred to as “Notice
Money and Money”.

Term Money refers to

Money lent for 15 days or
more in the Inter Bank
Market.
 Features of Call Money Market

1. Call money is an instrument for ultra-short period management of

funds and is easily reversible.

2. It is primarily a “telephone” market and is, therefore, administratively

convenient to manage for both borrowers and lenders.

3. Being an instrument of liability management, it provides incremental

funds and adds to the size of balance sheet of banks.
 High Liquidity

High Profitability

Advantages of
Call Money Maintenance of SLR

Market
Safe and Cheap

Assistance to Central Bank Operations

 Uneven development

Drawbacks of Lack of Integration

Call Money
Volatility in Call money rates
D. CERTIFICATE OF
DEPOSIT

A certificate of Deposit (CD) implies an

unsecured, money market negotiable
instrument, issued by the commercial bank
or financial institution, either in demat form
or as a usance promissory note, at a discount
to face value at market rates, against the
amount deposited by an individual, for a
stipulated time.
 FEATURES OF CERTIFICATE OF DEPOSIT

Eligibility Maturity Period Denomination Transferability

Reserve
Format Discount
Requirement
 RBI GUIDELINES

The denomination of CDs could be in multiples of Rs. 5 lakh subject to a minimum size
of an issue to a single investor being Rs. 25 lakh. The CDs above Rs.25lakh will be in
multiples of Rs.5 lakh. The amount rates to face value (not mortuary value) of CDs
issued.

The CDs are short-term deposit instruments with maturity periods ranging from 3
months to one year. The banks can issue at their discretion the CDs for any member of
months/ days beyond the minimum usance period of three months and within the
maximum usance of one year.

CDs can be issued to individuals, corporations, companies, trust funds, associations, etc.
non-resident Indians (NRIs) can also subscribe to CDs but only on a non- repatriation
 RBI GUIDELINES (Contd…)

CDs are freely transferable by endorsement and delivery but only after 45 days of the
date of issue by the primary investor. As such, the maturity period of CDs available in the
market can be anywhere between 1 day and 320 days.

They are issued in the form of usance promissory notes payable on a fixed date without
days of grace. CDs are subject to payment of stamp duty like the usance promissory
notes.

Banks have to maintain CRR and SLR on the issue price of CDs and report them as
deposits to the RBI. Banks are neither permitted to grant loans against CDs nor to buy
back prematurely
 RBI GUIDELINES (Contd…)

• From October 17, 1992, the limit for the issue of CDs by scheduled commercial
banks (excluding Regional Rural Banks) was raised from 7 percent to 10 percent
of the fortnightly aggregate deposits in 1989 — 90. The ceiling on outstanding
CDs at any point in time is prescribed by the Reserve Bank of India for each bank.
Banks are advised by the RBI to ensure that the individual bank-wise limits
prescribed for the issue of CDs are not exceeded at any time.
 Advantages of Certificate of Deposits

Certificates of deposits are the most convenient

CDs also offer maximum liquidity as they are
instruments to depositors as they enable their short-
transferable by endorsement and delivery. The
term surpluses to earn higher returns.
holder can resell his certificate to another.

From the point of view of issuing banks, it is a

vehicle to raise resources in times of need and
This is an ideal instrument for the banks with short-
improve their lending capacity. The CDs are fixed-
term surplus found to invest at attractive.
term deposits which cannot be withdrawn until the
redemption date.