Sunday, February 1, 2015

Money Market - Part III

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Please read previous posts on Money Market - Part I & II  (link in Blog Archive section)

Money Market Instruments (other than government issued)

1.  Call, Notice, Term Money
This is a method by which banks lend or borrow money from each other to maintain their daily needs. Note that no collateral security is needed, but interest need to be paid.

Call Money - deals in overnight (1 day) funds
Notice Money - deals in funds for 2 to 14 days
Term Money - deals in funds for 15 days - 1 year

Note that this is completely used in Inter-bank market. Eligible participants are -

  • Scheduled Commercial Banks (SCBs), excluding RRBs
  • Co-operative Banks, other than Land Development Banks
  • Primary Dealers (PDs)

2.  Certificates of Deposit (CD)
CDs are certificates issued by banks or other financial institutions (need to be qualified before issuing) to the general public, to raise short-term resources within the umbrella limit.

In the form of - Dematerialized (through Demat account) or Usance Promissory Notes

Issuer - Scheduled Commercial Banks (excluding RRBs), permit-granted Financial Institutions (FIs)
Issued to - individuals, corporations, companies (including banks), trusts, etc.

Maturity - Bank CDs (7 days - 1 year) and FI CDs (1 - 3 years)
Minimum size - Minimum amount of CD is Rs. 1 lakh, and multiple thereof

3.  Commercial Papers (CP)
CPs are unsecured instrument issued in the form of a promissory note (refer to my previous post to know more), that are issued by corporates.

In the form of - Promissory Notes

Issuer - Corporates, Primary Dealers (PDs), Financial Institutions (FIs). Note that all the corporates are not eligible for issuing CPs. They need a good rating (generally 'A-2', refer SEBI) from either rating agencies - CRISIL, ICRA, CARE, FITCH Ratings India Pvt. Ltd, etc.

Issued to - Individuals, banks, other corporates, NRI, FII (need SEBI approval)

Maturity - 7 days to 1 year
Minimum size - Minimum amount of CP is Rs. 5 lakh and multiple thereof

4.  Inter-Corporate Deposits (ICD)
These are issued by one corporate to other for their money requirements. You can think ICDs as analogous to Inter-bank deposits (call money, notice money, term money).

These are helpful for low-rated corporates, because they are not eligible to issue Commercial Papers (CP) to general public and raise money. So the alternative way for them, is to use ICDs.

This is not a full list. There are several other instruments in Money Market, that we are not discussing.

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Happy learning!

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