BANKING AWARENESS
MODULE - 23
WHAT IS FINANCIAL MARKET?
FUND
SURPLUS
GROUPS /
INDIVIDUALS
FUND
SCARCE
GROUPS /
INDIVIDUAL
S
 Exchange of money / money value instruments
 With interest / dividend
FINANCIAL MARKET
The market of an economy, where funds are transacted between the Fund Surplus and Fund Scarce individuals and
groups is known as FINANCIAL MARKET
BUT, WHAT ABOUT DURATION ?
GENERAL CLASSIFICATION
Requirement of funds
up to 364 days
(< 1 year)
Requirement of funds
for 365 days and more
(1 year and above)
Short term funds
Long term funds
Money market
Capital market
Financial market
Example in Day to Day life
Salaries on April 30
They are borrowing
for One or Two days
Employees
This is CALL MONEY
Normally, borrowing for few days is call money. But, there are specific names
Borrowing for Specific Name
1 Day
Call Money
2 to 14 Days
Notice Money
These are part of Money Market
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Example in Day to Day life
He is Borrowing for Few
Months
Fertilizer Shop
This is Money Market
Normally, borrowing for up to 1 year is
Money Market. But, there are specific names
Borrowing for
1 Day
2 to 14 Days
15 Days to 1 Year
Specific Name
Call Money
Notice Money
Term Money
Example in Day to Day life
Borrow
Fertilizer Shop
They Borrow with
Repayment of 5 to 10 years
Repay
This is Capital Market
MONEY MARKET AND CAPITAL MARKET
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I. MONEY MARKET
Treasury Bills
 Commercial Papers
Cash Management Bills
 Commercial Bills
Repo and Reverse Repos
 Call Money Market
Certificate of Deposits
II. CAPITAL MARKET
1
Govt. Dated
Securities Market
Though, Technically it is
part of Capital Market,
but this Market along
withTreasury Bills &
Cash Management Bills
is called“ Govt.
Securities Market”
and regulated By RBI.
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Industrial Securities
3
Development Finance
Institutions (DFIs)
 IPO (for new stocks)
 Stock Exchanges
(for old stocks)
 All India Financial
Institutions i.e. IFCI, IIBI,
etc..
 Sectoral Finance/Refinance
Institutions like SIDBI, NHB,
IIFCL, REC, PFC, IRFC, TFCI
etc…
 State Finance Corporations
2
4
Financial
Intermediaries
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Investment Banks
Merchant Banks
Mutual Funds
Leasing
Companies
 Venture Capital
INDIAN MONEY MARKET
SALIENT POINTS
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Here money is traded between individuals or groups (Financial Institutions, Banks or Govt. Companies).
Between cash surplus and cash scarce.
For short term lending up to 364 days.
Instruments which are traded can facilitate quick conversion to money.
The interest rate depends on demand and supply of cash.
Money market takes care of the financial mismatch of day to day operations of organizations,where as capital
market is used for creation of assets.
 Vibrant money market is essential for any economy and co-exists with capital market.
 Organised money market in India is just more than 2 decades old.
 In 1985, Chakravarthi Committee underlined the need for organised money market.
MONEY MARKET PARTICIPANTS
BANKS
 ICICI Bank
 HDFC Bank
 State Bank of India
 Axis Bank
 Union Bank
 Canara Bank

INDIAN MONEY MARKET
EXAMPLES
MONEY MARKET PARTICIPANTS
FINANCIAL INSTITUTIONS
 IIFL
 LIC
 IDFC
 IIFCL
1.
2.
3.
4.
5.
6.
7.
Treasury Bills (TBs)
Cash Management Bills (CMBs)
Repo and Reverse Repos
Certificates of Deposits (CDs)
Commercial Paper (CP)
Commercial Bill
Call Money Market
Let us discuss in brief…
TREASURY BILLS
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They are available in various forms since independence.
Got organized from 1986.
Issued by RBI on behalf of Central Government.
Used by the Central Government to fulfill short-term liquidity requirements up to 364 days.
91-day, 182-day, 364-day TBs are issued by the Govt.
In addition to Governments, they also function as short term investment avenues for Banks and Financial
Institutions.
 Trading is done on discounted rate, hence they are also called discounted instruments.
 Eligible as security for SLR.
CASH MANAGEMENT BILLS
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They are also discounted instruments like Treasury Bills, issued by RBI on behalf of Central Govt.
They are for maturities less than 91 days.
They were introduced in 2010 by RBI for short term liquidity
Most of the features are similar to Treasury Bills.
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REPO AND REVERSE REPOS
 These were introduced by RBI in December 1992 and November 1996 respectively.
We have already discussed about them in previous lectures
CALL MONEY MARKET
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It is short term financial market.
Transaction takes place on overnight basis.
Funds are transacted for a period between 1 to 14 days normally.
All the Scheduled Commercial Banks, Co-operative Banks and Primary Dealers (PDs) participate in the auction.
(Regional Rural Banks and Land Development Banks are not eligible to participate.)
 Interest rates are market driven.
Call/Notice Money Market
Call Money … Borrowing and lending of funds for one day
Notice Money … Borrowing and lending of funds for 2 to 14 days
Who can Participate?
Scheduled Commercial Banks
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KarurVysya Bank
ICICI Bank
Axis Bank
Union Bank
(RRBs are not allowed)
Co-operative Banks
Primary Dealers
 The Gujarat State co-op Bank Ltd
 The Andhra Pradesh State Co-operative
Bank Ltd
 MSC Bank
 Odisha State Cooperative Bank
 SBI DFHI Ltd
 PNB GILTS LTD
 Deutsche Bank
COMMERCIAL PAPER
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Introduced in India in 1990.
It is a privately placed Instrument.
It is unsecured money market instrument issued in the form of a promissory note.
Companies, Primary Dealers, Financial Institutions are permitted to issue Commercial Paper.
Net worth of the company should not be less than Rs.4 crore.
Duration is from 7 days to 1 year.
CERTIFICATE OF DEPOSIT
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Introduced in 1989.
Can be issued by Scheduled Commercial Banks or FIs (as authorized by RBI).
Minimum amount Rs.1 Lakh (further in multiples of Rs. 1 Lakh).
It is also a discounted instrument.
Time period... 7 days to 1 year (If issued by Commercial Banks)
1 year to 3 years (If issued by FIs)
COMMERCIAL BILLS DISCOUNTING
 These are the instruments that help companies to get advance payment for the invoices they raise after making
sales to their customers.
 They help companies to get money in advance for the sales they make.
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BILL DISCOUNTING
FIRE CRACKERS FIRM
IN DELHI
SOLD TO DELHI FIRM
FIRE CRACKERS FIRM
IN SIVAKASI
ADVANCE MONEY
BILL DISCOUNTING
WHAT IS DFHI Ltd
SBI DFHI Ltd
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It is Discount and Finance House of India Ltd.
It is one of the Primary Dealers (PDs) with majority shareholding by SBI.
It is established in 2004 with the merger of RBI promoted DFHI and SBI gilts Ltd.
It is one of the Primary Dealers dealing with Govt. Dated Securities, T-Bills, Call Money etc.
WHAT IS CCIL Ltd?
The Clearing Corporation of India Ltd
(An ISO/IEC 27001:2005 CERTIFIED Company)
 Commercial operations started from April, 2001.
 SCBs, FIs and PDs have established CCIL jointly.
 Primarily for providing exclusive clearing and settlements in money market instruments, dated government
securities and foreign exchange.
 Headquarters is in Mumbai.
A SNAPSHOT ON MONEY MARKET INSTRUMENTS IN INDIA
TREASURY BILLS (T-BILLS)
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Issued by RBI.
Discounted instruments.
91 day, 182 day, 364 day are available.
For short term liquidity requirements.
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CASH MANAGEMENT BILLS
Issued by RBI for the first time in 2010.
Discounted instruments.
Issued up to the duration of 90 days only.
Features almost similar to treasury bills.
CERTIFICATE OF DEPOSITS
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REPO AND REVERSE REPO
 Introduced in Dec 92 and Nov 96 respectively.
 RBI announces the rates through its monetary policy.
 Banks can resort to overnight lending subject to the
limits.
 The repo rate will have an impact on other interest
rates.
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Introduced in 1989.
Commercial banks/FIs can issue CD
Minimum amount Rs.1 Lakh.
7 days to 1 year (if issued by banks), 1 year to 3 years
(if issued by FIs).
Also discounted instruments.
COMMERCIAL PAPER
Private unsecured money market instrument.
Introduced in 1990.
Designed primarily for high rated corporate
borrowers.
Companies with minimum net worth of Rs. 4 crores,
PDs, FIs are also allowed.
7 days to 1 year.
Also a discounted instrument.
CALL / NOTICE MONEY
Overnight borrowing.
1 to 14 days.
Interest is market driven.
Commercial banks, co-operative banks, PDs are only
allowed (RRBs and LDBs are not allowed).