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. The money that is lent for one day in this market is known as “Call Money”, and if it exceeds one day (but less than 15 days) it is referred to as “Notice Money”. Term Money refers to Money lent for 15 days or more in the Inter Bank Market. These loans are given to brokers and dealers in stock exchange. Similarly, banks with ‘surplus’ lend to other banks with ‘deficit funds’ in the call money market. Thus, it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial banks can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile.
The call money market as a significant component of the money market possesses a few special characteristics:-
- Call money is an instrument for ultra-short period management of funds and is easily reversible.
- It is primarily a “telephone” market and is therefore, administratively convenient to manage for both borrowers and lender.
- Being an instrument of liability management, it provides incremental funds and adds to the size of balance sheet of banks.
From the macro-side, developed call money market helps to smoothen the fluctuations in the reserve-deposit rations of banks thereby contributing to the stability of the money-multiplier process. A stable money multiplier in turn serves as a reliable means of monetary regulation and policy guide. From the micro angle, short-run borrowing by banks improves the efficiency of funds management in two ways. One way, it enables banks to hold higher reserve-deposit ratio than would be possible otherwise. In another way, it allows some banks to permanently increase their pool of investible funds. Hence, active well-organized call money market improves the funds management practices of banks which in turn further their overall efficiency and profitability.
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 FBL cheque in favour of the borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the lender the duly discharges 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 DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal settlement advice is lender and receives RBI cheque for the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit receipt by the borrower.
Discount and Finance House of India (DFHI): The Working Group of Money Market, in its Report submitted in 1987, recommended, among other things, that a Finance House should be set up to deal in short-term money market instruments. As a follow-up on the recommendations of the Working Group, the Reserve Bank in India, in collaboration with the public sector banks and financial institutions, set up the Discount and Finance House of India Limited (DFHI) in April 1988. DFHI is the apex body in the Indian money market and its establishment is a major step towards developing a secondary market for money instruments. DFHI, which commenced its operations from April 25, 1988, deals in short-term money market instruments. As a matter of policy, the aim of the DFHI is to increase the volume of turnover rather than to become the repository of money market instruments. The initial paid up capital of DFHI is Rs.150 crores. Apart from this, it has lines of refinance from RBI and a line of credit from the consortium of public sector banks. As the apex agency in the Indian money market, the DFHI has been playing an important role ever since its inception. It has been promoting the active participation of the scheduled commercial banks and their subsidiaries, state and urban cooperative banks and all-Indian financial institutions in the money market. The objective is to ensure that short-term surplus and deficits of these institutions are equilibrated at market-related rates through inter-bank transactions and various money market instruments.
The main objective of DFHI is to facilitate the smoothening of the short term liquidity imbalances by developing an active money market and integrating the various segments of the money market. At preset DFHI’s activities are restricted to:
- dealing in 91 days and 364 days Treasury Bills.
- re-discounting short term commercial bills.
- participating in the inert bank call money, notice money and term deposits.
- Dealing in Commercial Paper and Certificate of deposits.
- Government dated Securities.
Call Loan Market Transactions and Participants
In India, call loans are given for the following purposes:
- 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 matures 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.
The participants in call money market can be classified into categories viz.
- Those permitted to act as both lenders and borrowers of call loans.
- Those permitted to act only as lenders in the market.
The first category includes all commercial banks. Co-operative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market.
Advantages of Call Money Market
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 profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily.
- Maintenance Of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon 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 have been prohibited form operating in the call market. Hence, banks need not pay brokers on call money transitions.
- 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 give 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 of Call Money
The call market in India suffers from the following drawbacks:
- Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development.
- Lack Of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration.
- Volatility In Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates very to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates very between 12% and 85%. One can not believe 85% being charged on call loans.