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Unknown facts about Call Money Market-Revealed !

The Call Money Market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. Banks with ’surplus funds’ lend to other banks with ’deficit funds’ in the call. Banks who seeks to avail liquidity approaches the call market as borrowers and the ones who have excess liquidity participate there as lenders. The Call Money Market is functional from Monday to Friday. When money is lent for a period of more than 1 day and up to 14 days then it is known as notice money. No collateral security is required to cover the call money transactions.

BANKS BORROW MONEY FROM THIS MARKET FOR THE FOLLOWING PURPOSES:

  • To fill the gaps or temporary mismatches in funds
  • To meet the CRR and SLR requirement as stipulated by the central bank
  • To meet the sudden demand for funds due to large outflows

PARTICIPANTS IN THE CALL MONEY MARKET

  • Scheduled commercial banks (excluding RRBs)
  • Development financial institutions
  • Primary dealers
  • Co-operative banks (other than land development banks)

INTEREST RATE

Eligible participants are free to decide the interest rates on the call/notice money market.

OPERATIONS IN CALL MARKET

Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-telephone market. After negotiations over the phone, 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 cheque in favor of the borrower. The borrower in turn issues calls money borrowing receipt. When the loan is repaid with interest, the lender returns the duly discharged receipt.

Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India (DFHI). The borrowers and lenders inform the DFHII 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 is taking 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 up to a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower.

ADVANTAGES

In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So, many advantages are available to commercial banks. They are as follows:

  • High liquidity

Money lent in a call market can be called back at any time {when needed), so, it is highly liquid. It enables commercial banks to meet, large sudden payments and remittances by making a call on the market

  • High profitability

Banks can earn high profits by lending their surplus funds to the call market when call rates are high and volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily.

  • Maintenance of SLR requirement

Call market enables commercial banks to maintain their statutory reserve requirements. Generally, banks borrow on a large-scale every reporting Friday to meet their SLR requirements in the absence of call market, banks have to maintain idle cash to meet their reserve requirements. It will have an impact on their profitability

  • Safe and cheap

Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers to have been prohibited from operating in the call market. Hence, banks need not pay brokerage on call money transactions.

  • Assistance to central bank operations

Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and it gives an indication to the central bank to adopt an appropriate monetary policy Moreover, the existence of an efficient call market helps the central bank to carry-out its open market operations effectively and successfully.

DRAWBACKS

The call market in India suffers from the following drawbacks:

  • Uneven development

The call money market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bengaluru, and Ahmedabad. Generally, call markets are associated with stock exchanges. Hence, the market is not evenly developed.

  • Lack of Integration

The call markets in different sectors are not fully integrated. Besides a large number of local all markets exist without any integration.

  • Volatility In call money rate

Another drawback is the volatile nature of the call money rates. Call rates vary to a greater extent in different centers in the different season. On a different day within a fortnight. The rates vary between 12 percent and 85 percent.

Pragati Rajoria

Pragati Rajoria

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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