A SUMMER TRAINING REPORT

ON

Money market and its instruments

SUBMITTED IN PARTIAL FULFILLMENT OF THE TWO YEARS MASTERS DEGREE IN

BUSINESS ADMINISTRATION

Submitted by Ishfaq Ahmad Dar

Reference no:-D1012SSISBE-A10065(DEL-6A-DA-1222)

IIPM

NEW DELHI
 Declaration
I ishfaq ahmad dar do hereby declare that the project report
entitled³money market and its instrument in investment
´ being submitted to is my own piece of work and it has not
been submit INDIAN INSTITUTE OF PLANNING AND MANAGEMENT
(IIPM)ted to any other institute or published at any time
before.

Ishfaq ahmad dar

reference No: - D1012SSISBE-A10065(DEL-6A-DA-1222)
IIPM New Delhi
 Acknowledgement

This report bears the imprint of many people. Right from the

experienced staff of Zonal Office The Jammu & Kashmir Bank LTD
Srinagar , to the staff of Indian institute of planning and
management (IIPM) New Delhi without whose support
and guidance  would have not got the unique opportunity to
successfully complete  my internship in this esteemed
organization. I take this opportunity to express my deep
gratitude to all the employees of Zonal Office The Jammu &
Kashmir Bank LTD Srinagar  . Also I am Indebted for the rich
guidance, knowledge and suggestions
Provided by my guide Mr. SYED GAZANFAR(A.EXECUTIVE)
INVESTMENT DEPARTMENT who took sincere efforts and
illustrated the Concept of Money market and its
Instruments , with their vast knowledge in the field, which
helped me in carrying out my internship.
Last but not least, I also thank all those people whom I met
in the organistion during my internship and helped me to
accomplish my assignments in the most efficient and
effective manner.
 EXECUTIVE SUMMARY

The basic aim of this project was to analyze the Money market
instruments interacting with the officials of investment department
directly.

The performance of J&K Bank is dependent on its investment

operations as around one third of the banks funds are deployed in
various investment avenues. Investment Department takes care of all
macro-economic affairs and is also responsible for maintaining
statutory requirements (CRR and SLR). The project will provide readers
a conceptual view about Money Market Instruments.

“Hope this research will help the readers to get acquainted with the
subject matter”.
 ABOUT J&K BANK
THE JAMMU AND KASHMIR BANK IS ONE OF THE FASTEST GROWING BANKS IN INDIA

WITH A NETWORK OF MORE THAN 561 BRANCHES SPREAD ACROSS THE COUNTRY

OFFERING WORLD CLASS BANKING PRODUCTS/SERVICES TO ITS CUSTOMERS. TODAY

THE BANK HAS STATUS OF VALUE DRIVEN ORGANIZATION AND IS ALWAYS WORKING

TOWARDS BUILDING TRUST WITH SHAREHOLDERS, EMPLOYEES, CUSTOMERS,

BORROWERS, REGULATORS, AND OTHER DIVERSE STAKEHOLDERS FOR WHICH IT HAS

ADOPTED A STRATEGY DIRECTED TO DEVELOPING A SOUND FOUNDATION OF

RELATIONSHIP AND TRUST AIMED AT ACHIEVING EXCELLENCE, WHICH OF COURSE

COMES FROM THE WOMBS OF GOOD CORPORATE GOVERNANCE. GOOD GOVERNANCE

IS A SOURCE OF COMPETITIVE ADVANTAGE AND A CRITICAL INPUT FOR ACHIEVING

EXCELLENCE IN ALL PURSUITS. JK BANK CONSIDERS GOOD CORPORATE GOVERNANCE

AS THE SINE QUA NON OF A GOOD BANKING SYSTEM AND HAS ADOPTED A POLICY

BASED ON ALL THE FOUR PILLARS OF GOOD GOVERNANCE-TRANSPARENCY,

DISCLOSURE, ACCOUNTABILITY AND VALUE, ENABLING IT TO PRACTICE TRUSTEESHIP,

TRANSPARENCY, FAIRNESS AND CONTROL LEADING TO STAKEHOLDER DELIGHT,

ENHANCED SHARE VALUE AND ETHICAL CORPORATE CITIZENSHIP. IT ALSO ENSURES

THAT BANK IS MANAGED BY AN INDEPENDENT AND HIGHLY QUALIFIED BOARD

FOLLOWING BEST GLOBALLY ACCEPTED PRACTICES, TRANSPARENT DISCLOSURE AND

EMPOWERMENT. BESIDES ENSURING TO MEET SHAREHOLDERS ASPIRATIONS AND

SOCIETAL EXPECTATIONS FOLLOWING THE PRINCIPLES OF MANAGEMENT EXECUTIVE

FREEDOM TO DRIVE THE BANK FORWARD WITHOUT UNDUE RESTRAINTS BUT WITH

THE FRAMEWORK OF EFFECTIVE ACCOUNTABILITY. THE EXCELLENCE ACHIEVED BY

BANK IN ITS OPERATIONS STEMMING FROM THE ROOTS OF VOLUNTARY

GOVERNANCE HAS NOT GONE UNRECOGNIZED AND BANK HAS RECENTLY BAGGED
THREE VERY PRESTIGIOUS AWARDS FOR FAIR BUSINESS PRACTICES AND

COMMITMENT TO SOCIAL OBLIGATIONS .

CORPORATE GOVERNANCE

J&K Bank has been committ ed to all the basic tenets of good Corporate Governance

well before the Securiti es and Exchange Board of India and the Stock Exchanges

pursuant to Clause 49 of the Listi ng Agreement mandated these. Now, it is our

Endeavour to go beyond the lett er of the Corporate Governance codes and apply it

innovati vely in a more meaningful manner thereby making it relevant to the

organizati on that is operati ng in a specifi c environment, which is diff erent from the

generic Anglo-Saxon one. In line with the vision, J&K Bank wants to use Corporate

Governance innovati vely in a transiti onal economy like Jammu and Kashmir. The

Bank wants to use Corporate Governance as an instrument of economic and social

transformati on. In due course, we would set our self targets of social and economic

reporti ng as a part of annual disclosures. This will help us conceptualize and

contextualize the form and content of Corporate Governance in a developing state.

Given the fact that J&K Bank is and is seen as a great success of” public-private

partnership”, our Bank as a business is expected to play a role in social

transformati on of the economy. This lends urgency to implementati on of good

governance practi ces which go beyond the Corporate Governance code. Operati ng in

an environment that is emerging from a situati on of civil strife, the issue of

Corporate Governance assumes a diff erent and greater relevance. We, as the prime
corporati on of Jammu and Kashmir, have a vested interest in making the state a

safe place for business. J&K Bank has a key role to play in providing public and

private services, fi nancial infrastructure and employment. As such, the effi ciency

and accountability of the corporati on is a matt er of both private and public

interest, and governance, therefore, comes at the top of the agenda. The fact that

the bank is state owned but professionally managed, having a large size of

internati onal investors, governance is criti cal. For us Corporate Governance is

concerned with the systems of laws, regulati ons, and practi ces, which will promote

enterprise, ensure accountability and trigger performance. The J&K Bank, for one,

stands for being more accountable, practi ce self-policing and make fi nancial

transacti ons transparent and consti tuti onal. The directors of J&K Bank have make it

an engine of social transformati on. As an eminent corporate jurist (Chancellor

William T. Allen) from US says, “A corporate director has civic responsibility. The

people, who accept this responsibility, do it conscienti ously and well deserve our

respect as they are serving a nati on. But those who as directors are passive and

view their role as mere advisers, are pliable and pleasant but do not insist on a real

monitor’s role, do small service to anyone and deserve litt le respect”. Our directors

belong to the former category.

Vision of J&K Bank

The Bank's vision is to be fi nancially sound, profi table, growth and technology

oriented, committ ed to building and maximizing sustainable value for all its

stakeholders. The Bank is committ ed to achieve healthy growth in profi tability and

simultaneously to remain consistent with the Bank's risk appeti te and at the same

ti me ensuring the highest levels of ethical standards, professional integrity and

regulatory compliance. “To catalyze economic transformati on and capitalize on

growth”. The vision is to engender and catalyze economic transformati on of Jammu

and Kashmir and capitalize from the growth induced fi nancial prosperity thus

engineered. The bank aspires to make Jammu and Kashmir the most prosperous

state in the country, by helping create a new fi nancial architecture for the J&K

economy, at the center of which will be the J&K Bank.

Mission Statement
J&K Bank’s mission is two-fold: To provide the people of J&K internati onal quality

fi nancial service and soluti ons and to be a super-specialist bank in the rest of the

country. The two together will make us the most profi table bank in the country.

BANK’ S PROFILE
Jammu & Kashmir Bank was founded on October 1, 1938 and commenced business

from July 4, 1939. The Jammu & Kashmir Bank Limited has been the fi rst of its

nature and compositi on as a state owned bank in the country. The Bank was

established as a semi State Bank with parti cipati on in capital by state and the

public under the control of state government.The bank has to face serious problems

at the branches ti me of independence when out of its total of its total of ten

branches two branches of Muzaff arabad and Mirpur fell to the other side of the

line of control (now Pakistan occupied Kashmir) along with cash and other assets.

Following the extension of central laws to the state of Jammu & Kashmir, the bank

was defi ned as a government company as per the provisions of Indian Companies

Act 1956.

Today, Jammu and Kashmir Bank is one of the fastest growing banks in India with a

network of more than 500 branches/offi ces spread across the country off ering world
class banking products/services to its customers. The Bank recently bagged three

very presti gious awards for fair business practi ces and commitment to social

obligati ons.

SPECIAL FEATURES OF THE BANK

1. Incorporated in 1938 as a Limited Liability Company.

2. Governed by Companies Act and Banking Regulation Act of India.
3. Regulated by Reserve Bank of India (RBI) and securities exchange Board of India (SEBI).
4. Listed on both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
5. 53% of the totals share are owned by Government of Jammu and Kashmir Government.
6. Rated ‘P1’ by Standard and Poor_ CRISIL connoting highest degree of safety.
7. Four decades of uninterrupted Profitability and dividends.

BOARD OF DIRECTORS

1. Mr. Mushtaq Ahmad Chairman

2. Mr. Sudhanshu Pandey Director

3. Mr. Arnab Roy Director

4. Mr.M.I Shahdad Director

5. Mr.Vikrant Kuthiala Director

6.Mr.A.M Matto Director

7.Mr.Prof.Nissar Ali Director

8. Mr. G.M. Dug Director

9. Mr. B.L. Dogra Director

10. Mr.A.K.Mehta Executive Director

11. Mr. Abdul Majid Mir Executive Director

Functions of the Board

J&K Bank’s Board plays a pivotal role in ensuring good governance. Its style of

functi oning is democrati c. The members of the board have always had complete

freedom to express their opinion and decisions are taken on the basis of a

consensus arrived at aft er detailed discussion. The members are also free to bring

up any matt er for discussion at the board meeti ngs with the permission of the

Chairman. The day-to-day management of the Company is conducted by the

Chairman and C.E.O subject to the supervision and control of the Board of the

Directors. The functi ons performed by the the Board of the bank for effi cient and

eff ecti ve uti lizati on of resources at their disposal to achieve the goals, visualized,

interalia, include setti ng Corporate Missions, Laying down Corporate Philosphy,

formulati on of strategic and other Business Plans, Laying down of control measures

and compliance with Laws and Regulati ons .

Unique Characteristics: One of a kind

1. Private sector Bank despite government holding 53 per cent of equity.

2. Sole banker and lender of last resort to the Government of J & K.
3. Plan and non -plan funds, taxes and non-tax revenues routed through the bank.
 4. Salaries of Government officials disbursed by the Bank.
5. Only private sector bank designated as agent of RBI for banking.
6. Carries out banking business of the Central Government.
7. Collects taxes pertaining to Central Board of Direct Taxes in J & K.

Brand Identity
The new identi ty for J&K Bank is a visual representati on of the Bank’s philosophy

and business strategy. The three colored squares represent the regions of Jammu,

Kashmir and Ladakh. The counter- form created by the interacti on of the squares is a

falcon with outstretched wings – a symbol of power and empowerment.

The synergy between the three regions propels the bank towards new horizons.

Green signifi es growth and renewal, blue conveys stability and unity, and red

represents energy and power. All these att ributes are integrated and assimilated in

the white counter- form.

ORGANIZATION STRUCTURE (investments)

 Treasury Operations
1. Objectives

Main objectives of a bank Treasury is to maximum the returns with

optimum risk, this will improve the profitability of the bank and thereby
create value for its shareholders. Returns are associated with risks. High
risk-business gives high returns while low/zero risk yield only low/ nil
returns. It should be the Endeavour of treasury to maximize the profit with
in the given policy laminations. How ever profits are associated with
risks, therefore treasury has to see that as for as possible, the risk
associated with are totally hedged.
Control and minimizing the risk faced by the Bank is another objective
of the Treasury. It has to ensure that the Bank is not unnecessarily
exposed to risks, liquidity risks, market risks, funding risks, currency
risks, which should be effectively managed/hedged by the Treasury.
With diminished margins and increased completion for high quality
business on account of financial system reforms/ liberalization, there has
been intense pressure on a Bank to increase profitability. In a changed
circumstances. The focus has shifted towards maintaining maximizing the
‘spreads’ (Net interest margin) and control of risks, for which the treasury
should contribute by various techniques/operations like sourcing of low
cost funds by accessing diverse range of markets and entities with
liquidity. Treasury should play a vital role in increasing the ‘fee income’
of the bank through activities like trading in stock and securities etc.
Treasury function is also to be regarded as a service to the rest of the
business. It has to manage the residual funds to the bank, funds left
after deploying in the core activity to the bank, by developing it
appropriately, treasury, thus, is to be regarded as, “from line” in the
sense that it either makes profit in its own right or supports other areas
of the bank’s business to make profit (or minimize losses)

The treasury should also play a role, direct or indirect, in almost all the
heads, both on the Asset and liability sides, in the balance sheet. May
be it is for raising resources (Funding of assts) when there is need for
liquidity or for deployment in profitable avenues (Asset creation) when
there is surplus liquidity. Balance sheet management is yet another
important function of the Treasury.

At the macro level when the domestic market/economy is integrating

with the global economy, it is needless to emphasize the need for
integration of the macro level units. Most commercial banks had
already realized the fact and integrated their domestic treasury. It is in
this context; J&K Bank also integrated the functions of treasury and set
up an integrated Treasury under one roof with the following objective:

Proximity enables dealers remains informed of the development in

other markets.
Divergences in money and forex markets often give arbitrage
opportunities.Possibility of development / mobilization of resources at
better yield.

An intergraded treasury plays a vital part of any commercial bank’s

activities. It front-ends the bank in the inter bank and financial be they
money, gilt, bond, equity, foreign exchanges or derivatives.

Major Functions
In a backdrop of above objectives, the responsibilities of the treasury
cannot be recognized with any particular set of functions because its
encompasses, directly or indirectly, almost all activities of the Bank.
However the principal functional responsibility of the treasury is the
current asset / liability management (Which includes Reserves
management) and investments of the Bank. Our treasury has to
proactive and participative and not only react to internal thoughts and
ideas of the ma management. An efficient Treasury is thus always a
“profit center” for the bank.

In view of the above, major responsibilities/ functions of the treasury

includes

Domestic Treasury Function

Reserve Management
  Cash Management
 Liquidity Management
 Investment Portfolio Management
 Portfolio Management on behalf of clients
 Control and risk Management
 Guiding ALCO/ALM
Foreign Exchange Dealing
 Function as a “A” category
 Maintain Nostro accounts
 Cover up operations for Merchants business
 Inter-bank forex dealing
 Trading in foreign currencies
 Arrange foreign currency funds for leading to Corporates
 Foreign investment
 Coordinate with domestic segment for fund management.
 Explore various arbitrage opportunities.

Derivative Business

Domestic Derivative Segment

 Interest rate derivatives.
 Futures & Options
Forex Derivatives
 Forward exchange contracts
 Currency futures & Options

Financial sectors

The various financial markets available to a treasury are as under:

 Money market.
 Debt market.
 Capital markert and
 Foreign exchange market.
Money Market

The term "Money Market" refers to the market for short-term

requirement and deployment of funds. Money market instruments are
those instruments, which have a maturity period of less than one year.
The most active part of the money market is the market for overnight
and term money between banks and institutions (called call money)
and the market for repo transactions. The former is in the form of loans
and the latter are sale and buy back agreements – both are obviously
not traded. The main traded instruments are commercial papers (CPs),
certificates of deposit (CDs) and treasury bills (T-Bills). All of these are
discounted instruments i.e. they are issued at a discount to their
maturity value and the difference between the issuing price and the
maturity/face value is the implicit interest. One of the important
features of money market instruments is their high liquidity and
tradability. A key reason for this is that these instruments are
transferred by endorsement and delivery. Another important feature is
that there is no tax deducted at source from the interest component.

Money Market Instruments :

 Commercial Papers

 Commercial Bills

 Certificates of Deposit

 Treasury Bills

 Call money market

Debt market

Debt market refers to the financial market where investors buy and
sell debt securities, mostly in the form of bonds. These markets are
important source of funds, especially in a developing economy like
India. India debt market is one of the largest in Asia. Like all other
countries, debt market in India is also considered a useful substitute
to banking channels for finance
 Capital market

Capital market deals in instruments which allows users of funds to

directly raise funds from the investors instead of sourcing the funds
from intermediaries like banks, financial institutions etc.

In vary simple terms, ‘Capital’ is described as owners stake or

investment in the business’. The investors (shareholders) are rewarded
by way of dividend (in case the profits are adequate).

Foreign Exchange market

Purchase or sale of one nation currency in exchange for another is

conducted in a market setting called foreign exchange market.Foreign
exchange makes possible international transaction such as import and
export and the movement of capital between countries. The value of
one foreign currency in the relation to another is defined by the
exchange rate.

 As such, broader spectrum of Treasury Management

encompasses the following
 Domestic Treasury Operation.
 Foreign Exchange treasury operations Derivatives
 CATEGORIZATION

The entire investment portfolio of the bank has to be classified

under three categories: as per RBI guidelines issued. These categories
are 1) held to maturity (HTM), 2) available for sale for sale (AHS) and 3)
held for trading (HFT).

A. Held for maturity: The investment under this category have

to be kept up to 24% of bank’s total investments. The Deptt, may
as allowed by RBI keep under these category securities less than
24% at its discretion but it should not exceed 40%. However, for
the purpose of ceiling the following investments can be kept
under this category but will not be counted for the purpose of
ceiling.

a) Re-capitalization bonds of Govt. of India

b) Invests in subsidiaries and joint ventures.

c)invests in bonds/debentures deemed to be in the nature of an

advance ( as defined in the above referred to RBI circular) profit
on sale of investments in this category shall be first taken to profit
and loss account and there after appropriated to capital reserves
account. Loss on sale in these investments shall be recognized in
profit & loss account.
B. Available for sale (AFS):- The bank is having the freedom to
decide the extent of holdings under AFS and held for trading
categories. This has to be decided by the central treasury after
considering various aspects such as basis of intent, trading
strategy, risk management capabilities, tax planning, manpower
skill and capital position etc. the securities acquired by the bank
with the intention to trade by taking advantage of short term.

Price interest rate movement will be classified under held for

trading. These securities are to be sold within 90 days. If the
department is not in a position to sell it within 90 days due to
exceptional.

Circumstances such as tight liquidity conditions or extreme

volatility or market becoming un-directional, the security may be
shifted to AFS category. The securities, which do not fall within
HTM and HFT categories, have to be classified under AFS
categories.

In the previous section a detailed analysis of various markets

has already been performed.

We turn now to specific analysis of particular security

market. We begin by analysis debt securities. A debt security is a
 claim on a specified periodic stream of income. Debt securities are
often called fixed income securities because they promise either a
fixed stream of income or a stream of income that is determined
according to a specified formula. These securities have the
advantage of being relatively easy to understand because the
payment formulas are specified in advance. Risk considerations
are minimal as long as the issuer of the security is sufficiently
creditworthy. Therefore those securities are a convenient starting
point for our analysis of the universe of potential investment
vehicles.

CALL MONEY LENDING/BORROWING

Product Description

Call money is overnight (or till the next working day) borrowing or
lending. Call Money is a money market instrument wherein funds are
borrowed/lent for a tenor of one day/overnight (excluding
Sundays/holidays). It is not backed by collateral.
 RBI LIMIT ON CALL MONEY LENDING/ BORROWING

 On a fortnightly average basis, lending (including notice money

should not exceed 25% of their capital funds however banks are
allowed to lend a maximum of 50% of their capital funds on any
one day, during a fortnight.
 On a fortnightly average basis, borrowing (including notice
money) should not exceed 100% of capital funds (i.e., sum of tier1
and Tier2 capital) of latest audited balance sheet. However banks
are allowed to borrow a maximum of 125% of their capital funds
on any day, during a fortnight.

COUNTER PARTY EXPOSURE LIMITS

While lending in call money /short term deposits the treasury has
to take care of counter party exposure limits. The individual bank
–wise limits have been last fixed and approved by the Board.
These limits are to be reviewed every year on the financial
strength of these counter parties. In this connection the
management has asked the treasury to develop a scientific
module that can analyze the qualitative as well as quantitave
parameters of the counter party for arriving at a genuine limit.

TRANSACTION PROCESS AND RESTRICTIONS

The borrower of funds will collect through/cheque and hand over

the deposit receipt to the lender on the value date of the deal. On
the due date, the lender will give back the deposit receipt to and
collect the cheque from the borrower. The interest rates are
determined by liquidity in the inter bank market and financial
system, the repo rate and reverse repo rate

Participants in call money market currently include banks, Primary

dealers development finance institutions select insurance
companies and select mutual funds of these banks and PD’s can
operate both as borrowers and lenders in the market. Non-bank
institutions, which have been given specific permission to operate
in call/notice money market, can however, operate as lenders
only.

Inter-bank borrowing is exempt from CRR. However, if the lender

is not a bank, CRR applies.

TRADING PLATFORM
 Deals are mostly concluded on NDS_Call. For such deals the
procedure is simple and automatic. The deals concluded over
phones must be reported on NDS but settlement is outside NDS,
through RBIs high value clearing or RTGS. Deals should be
reported within 15 minutes in NDS, irrespective of size of the deal
9or whether the counter party is a member of the NDS or not in
case, there is repeated non reporting deals by an NDS member it
will be considered whether non reported deals by that member
should be treated as invalid with effect from a future date

TRADE ROUTING

The traders are routed directly between banks and counter party.
Broker intermediary is not allowed

INTEREST CALCULATION

Interest is calculated on actual /365 basis. The interest payable is

rounded off to the nearest rupee. Thus if Rs 10 Crores borrowed over

night at 8% p.a., interest is calculated as( 0.088x1/365 x 10 Crores)=Rs

21918( rounded to the nearest rupee)

 NOTICE MONEY LENDING/ BORROWING

Notice money is borrowing or lending maturing in more than one day

but less than 15 days. Both borrower and lender have the option to

prepay/recall with 24 hours notice. The brrower/lender must convey

his intention to repay/recall the amount borrowed/ lent with at least24

hours notice.

RBI LIMIT ON NOTICE MONEY LENDING/ BORROWING

ON A FORTNIGHTLY AVERAGE BASIS , Lending ( including call

money) should not exceed 25% of their capital funds; however banks

are allowed to lend a maximum of 50% of their capital funds on any

day, during a fortnight

On a fortnightly average basis, borrowing (including call money) should

not exceed 100% of capital funds (i.e., sum of Tier 1 and Tier 2 of latest
audited balance sheet. However banks are allowed to borrow a
maximum of 125% of their capital funds on any day, during a fortnight.
TRANSACTION PROCESS AND RESTRICTIONS
The borrower of funds will collect the cheque and hand over the
deposit receipt to the lender on the value date of the deal on a due
date, the lender will give back the deposit receipt to and collect the
cheque from the borrower. The interest rates are determined by
liquidity in the inter bank market and financial system, call money rate,
the repo rate and reserve repo rate

Participants in money market currently include banks primary dealers

development finance institution, select insurance companies and select
mutual funds. Of these, banks and PD’s can operate both as borrowers
in the market. Non bank institutions, which have been given specific
permission to operate in call/notice money market, can however,
operate as lenders only. Inter bank borrowing is exempt from CRR.
However if the lender is not a bank CRR applies.

TRADING PLATFORM

Deals are mostly concluded NDS. However, the deals concluded on

phone must be reported on NDS, through RBI’s high value clearing or

RTGS. Deals should be reported on NDS within 15 minutes on NDS,

irrespective of the size of the deal or whether the counterparty is a

member of the NDS or not. In case, there is repeated non reporting

of deals by an NDS member, it will be considered whether non

reporting deals by that member should be treated as invalid with effect

from a future date.

TRADE ROUTING

The trades are routed directly between bank and counterparty. Broker

Intermediary is not allowed.

INTEREST CALCULATION

Interest is calculated on actual/365 basis. The interest payable is

rounded off to the nearest rupee .Thus , if Rs. 10 Crores is borrowed for

5 days @ 8.00% p.a. interest is calculated as ( 0.08 x 5/365 x 10 Crores)

= Rs 1,09,589.
 TERM MONEY (STD )LENDING/BORROWING

PRODUCT DESCRIPTION

Term money also called “Short term Deposit Placement” in the Bank, is

the borrowing or lending for maturities beyond 15 days without

collateral. Bank is exempt from CRR for sub or one year borrowing if the

borrowing is inter-bank but must provide for SLR. Normally the rate of

interest on term money is fixed and interest payment is along with

principal on maturity. However, there is no restriction in payment of

coupon periodicity or the tenor. The interest rate can either be fixed or

floating. The maximum term money placements between the banks in

the past have been for a period as long as 5 years with half yearly

coupon payments.

Premature cancellation after 14 days can be done by mutual agreed

terms.

TRANSACTION PROCESS AND RESTRICTIONS

The borrower of funds will collect the payment either through RTGS or

cheque and handover the deposit receipt to the lender on the value

date of the deal. On the due date, the lender will give the deposit

receipt to and collect the payment from the borrower. In case the

maturity of term money falls on a holiday, the repayment will be made

on the next working day. Additional interest will be paid for such period

on the amount borrowed ( principal only) at the contracted rate.

The interest rates depend on the T-bill and CP yields for the tenor. The

interest rates should normally lie between the two but sometimes

exceed later because of the liquid bank institutions which have been

given specified requirements of specific banks or financial year ending

pressures.

Term money borrowing and lending could also be of the floating rate

time in which the period of deposit is fixed but the rate of interest is

reset every day. Interest may or may not be compounded daily.

Participants in term money currently include banks primary dealers,
development finance institutions, select insurance companies and
select mutual funds. Of these, banks and PD’s can operate both as
borrowers and lenders in the market. Non bank institutions which have
been given specific permission to operate in call or notice money
market can, however, operate in call/notice money market can,
however, operate as lenders only. No loan or overdraft can be granted
against term money. STD should not exceed limits, if any, or lending
placed through placed through the investment policy of the bank.

TRADING PLATFORM

Deals are mostly concluded on phone. Concluded deals must be

reported on NDS, through RBI’s high value clearing or RTGS. Deals

should be reported on NDS within 15 minutes on NDS, irrespective of

the size of the deal or whether the counterparty is a member of the

NDS or not. In case, there is repeated non reporting of deals by an NDS

member, it will be considered whether non reported deals by that

member should be treated as invalid with effect from a future date.

 TRADE ROUTING

The trade is routed directly between bank and counterparty. Broker

intermediary is not allowed.

INTEREST CALCULATION

Interest is to be calculated on actual/365 days basis and is to be

rounded off to the nearest rupee. Periodicity for payment of interest
can also be quarerly/halfyearly/ on redemption, as agreed to at the line
of the deal. Interest can be either fixed or floating and may or may not
be compounded daily.

For instance, a 90 day borrowing of Rs. 10 Crores @ 7.00% (fixed) per

annum would cost Rs. (90/365 x 10 Crores) = Rs 17,26,027.

COLLATERALISED BORROWING & LENDING OBLIGATION

PRODUCT DESCRIPTION

Collateralized borrowing and lending obligation (CBLO) is a secured

form of borrowing and lending. The collateral is government of India
securities and treasury bills with residual maturity over six months.

Collateralized borrowing and lending obligation, a money market

instrument as approved by RBI, is a product developed by CCIL for the
benefit of the entities who have either been phased out from inter
bank call money market or have been given restricted participation in
terms of ceiling on call borrowing and lending transactions and who do
not have access to the call money market. CBLO is a discounted
instrument available in electronic book entry form for the maturity
period ranging from one day to ninety days (can be made available up
to one year as per guidelines).In order to enable the market
participants to borrow and lend funds, CCIL provides the dealing system
through Indian financial network (INFINET), a closed user group to the
members of the negotiated dealing system (NDS) who maintain current
account with RBI.

CCIL membership of CBLO segment is exempted to banks, financial

institutions, insurance companies, mutual funds, primary dealers,
NBFC’s non –government provident funds, Corporates etc. The
members are required to open constituent SGL (CSGL) account with
CCIL for depositing securities which are offered as collateral/margin for
borrowing and lending of funds.

TRANSACTION PROCESS AND RESTRICTIONS

Borrowing limit for the members is fixed everyday after marking to

market and applying appropriate hair-cuts on the securities deposited
in the CSGL account. The post hair- cut mark- to- market value after
adjusting for the amounts already borrowed by the members is the
borrowing limit, which, in effect, denotes the drawing power up to
which the members can borrow funds. Members are required to
deposit initial margin generally in the form of cash/government
securities and initial margin is computed at the rate of 0.50% on the
total amount borrowed /lent by the members.

For lending, deals are allowed only with approved counterparties. The
borrowing/lending rates for CBLO are determined electronically using
CCIL’s trading platform and depend on the demand and supply of funds.
The “normal” market settles on T+0 or T+1 to specified timings. The
normal market can be accessed for borrowing funds to the extent of
their available borrowings limit, besides members can sell CBLOs held
by them to meet their funds requirement instead of waiting till
maturity. Members intended to sell CBLO’s (borrow funds) place their
offers directly on the market watch screen indicating the amount and
rate for a specific CBLO. Likewise, members to buy CBLO’s (lend funds)
place their bids specifying the amount and rate for a particular CBLO.
The matching of bids and offers takes place on Best yield- Time priority
basis.

There is also an “auction “market facility, through practically all trades

is done in the “normal “market.

TRADING PLATFORM
The trading platform is provided by CCIL

TRADE ROUTING

The trades are routed directly between bank and counterparty. Broker
intermediary is not allowed.

DAY COUNT CONVENTION

Discount is calculated on actual /365 basis. The interest payable is

rounded off to the nearest rupee. Thus, if Rs 10 Crores is borrowed
overnight @ 8.00 per annum. Discount is calculated as (0.08x1/365x 10
Corers) =Rs 21,918.

Certificate of deposit
Product Description

These are issued by banks in denominations of Rs0.5mn. Banks are

allowed to issue CDs with a maturity of less than one year while
financial institutions are allowed to issue CDs with a maturity of at least
one year. These are issued in denominations of Rs.5 Lacs and Rs. 1 Lac
thereafter. Bank CDs have maturity up to one year. Minimum period for
a bank CD is fifteen days. Financial Institutions are allowed to issue CDs
for a period between 1 year and up to 3 years. Usually, this means 366
day CDs. The market is most active for the one year maturity bracket,
while longer dated securities are not much in demand. One of the main
reasons for an active market in CDs is that their issuance does not
attract reserve requirements since they are obligations issued by a
bank. They are like bank term deposits accounts. Unlike traditional time
deposits these are freely negotiable instruments and are often referred
to as Negotiable Certificate of Deposits. And are also freely transferable
by endorsement and delivery. At present CDs are issued in physical
form (in the form of Usance promissory note). CD’s are not required
to be rated. CD is subject to payment of Stamp Duty under Indian
Stamp Act, 1899 (Central Act).
All scheduled banks (except RRBs and Co-operative banks) and
financial institutions are eligible to issue CDs. They can be issued to
individuals, corporations, trusts, insurance companies, funds and
associations. Non-resident Indians can invest in CD’s on a non-
repatriable, non transferable basis. They are issued at a discount
rate freely determined by the issuer and the market/investors.

Banks / FI’s can’t grant loans against CD’s. Furthermore, they can’t buy
back their own CDs before maturity.Banks have to maintain the
appropriate reserve requirements, i.e., cash reserve ratio (CRR) and
statutory liquidity ratio (SLR) , on the issue price of the CDs.

Discount Rate

CDs may be issued at a discount on face value. Banks /FI’s are also
allowed to issue CD’s on floating rate basis provided the methodology
of compiling the floating rate is objective, transparent and market
based. The issuing Bank / FI is free to determine the discount/ coupon
rate. The interest rate on floating rate CDs would have to be reset
periodically in accordance with a predetermined formula that indicates
the spread over a transparent benchmark. Thus, CDs can be issued on
discount value basis or coupon bearing basis. The parties to contract
are free to determine the discount rate.

Discount is calculated on actual / 365 day basis.

The discount to be calculated on rear-ended basis. The price is to be

calculated up to a maximum of four decimal places and rounded off to
the 4th decimal place.Scenario A:In case yield is given then:
Price =

100

PP=== ----------------------------------------------------------------------

(1 + yield* No. of days to maturity)

-------------------------------------------

365*100

Scenario B: In case price is given then:

Yield= (100- Price)* 365*

(price *No. of days to maturity)

TRANSACTION PROCESS AND RESTRICTIO

Investing in Primary issues

The investor has to apply for investment in CD in CD application format.

The back office is required to transfer funds to issuer’s account either
through RTGS or RBI cheque. The investor bank advices issuer of its
Depository Account details and the issuer send the CD to the
Depository for custody in banks name. Issuer also provides CD
Redemption Account details to the bank.

Investing Through Secondary Market

Currently, Banks are authorized to invest in CDs only in demat form.

The counter parties may decide upon the sequence of delivery of funds
and securities at the time of concluding the deal in the secondary
market.

Buying

In respect of investment through secondary market, the investor bank

has to invest the CD through usual channels similar to other
instruments such as debentures. The dealer has to prepare a deal slip
giving details of issuer, face value, discounted price and maturity. The
investor has to receive deal confirmation from the seller and also send
his own deal confirmation to the seller. He also has to advise the seller
the DP details. The seller must send delivery instruction to its DP for
transfer of CD to custody of bank’s DP.

The investor has to issue the RTGS funds transfer instruction or

cheque /pay order favoring the seller.
Selling

The transaction is done over normal dealing platforms. A Deal Slip

giving details of issuer, face value, discounted price and maturity and
Deal Confirmation is prepared and sent to buyer. Deal Confirmation
should specifically state that there is no recourse to bank if issuer
defaults on redemption. Simultaneously, the seller receives a Deal
Confirmation from the buyer. The buyer transfers funds through RTGS
to bank (or bank gets cheque /pay order). The buyer advises bank of its
DP details and bank sends Delivery instruction to its DP for transfer to
the Buyer’s DP.

Redemption of CDs in Bank’s Investment Portfolio

Bank asks DP to transfer its CD to the CD Redemption Account of the

issuer. (This should be done at least 2 working days in advance). Copy
of this instruction to Bank’s DP to be sent to issuer with details of
center and account to which bank requires the redemption payment to
be remitted. In case, the redemption date is a holiday, redemption is
done the previous working day.

Risks Involved
  Price risk/Interest rate risk

 Liquidity risk

 Credit risk – Counter party risk is minimal since CD is a secure

instrument

 Sett lement Risk

Derivative Usance Promissory Notes

Product Description

Derivative Usance Promissory Notes (DUPN) or Bills Rediscounting

Scheme (BRD) are instruments accepted for payment by a bank on a
specific maturity date. Underlying a bill is a transaction representing
supply of goods drawn by the supplier on the buyer. The supplier
discounts the bill with his bank, the discount representing the
interesttill maturity. BRD is the rediscounting of trade bills, which
havealready been purchased by/ discounted with the bank by the
customers.The banks normally rediscount the bills that have already
been discounted with them or raise usance promissory notes in
convenient lots and maturities and rediscount them. The bill (or a
portfolio of such bills) is converted into a promissory note (called
Derivative Usance Promissory Note- DUPN) by the discounting bank.
The minimum and maximum tenors are 15 and 90 days respectively.
Discounted / rediscounted bills/ DUPN’s are transferable by
endorsement and delivery. In the process, they become marketable,
liquid instruments. Market is OTC.

Only the DUPN’s move to the rediscounting bank’s. The underline bills
remain in the custody of the (Primary) discounting bank.

DAY COUNT CONVENTION AND DISCOUNT RATE

The parties to contract are free to determine the discount rate.

Discount is calculated on actual/365 day basis. The amount payable to
the brrower is the principal amount less the discount/interest .While
discounting a bill /DUPN’s the amount of discount is to be deducted at
the time the bill/DUPN is issued .The discount is rounded of to the
nearest rupee. On maturity the brrower would repay the principal
amount.

EXAMPLE

Transaction Amount: RS 10,00, 00,000/-(Rupees ten crore) (principle

amount)

No. of days : 45 days

Rate of Discount : 10.25 p.a.

Discount : Transaction Amount*No. of days*Rate of

interest/discount 365*100

i.e; 10,00,00,000*45 *10.25

 365*100

i.e; Rs 9,87,36,301/-

Amount to be repaid on maturity: Rs 10, 00, 00,000

TRANSACTION PROCESS AND RESTRICTIONS

The following types of bills can be accepted for rediscounting:

 A bill drawn on and accepted by the purchaser’s bank and where

the latter is not a licensed commercial bank, it should in addition
bear the signature of a licensed bank.
 A bill drawn on the buyer’s bank jointly and accepted by them
jointly.
 A bill drawn on and accepted by the buyer under an irrevocable
letter of credit and certified by the buyer’s bank, which has
opened the letter of credit.
 A bill drawn on and accepted by the buyer and endorsed by the
seller in favour of his bank and bearing a legend signed by a
licensed scheduled bank who should be an endorser of the bill.
 The bill of exchange should be a genuine trade bill and should
have arisen out of sale of goods.
 The bill should have a maturity period of not more than 90 days.
  The bill should contain a clause indicating the nature of the
transaction out of which it has arisen.
 Bills arising out of sale of prohibited commodities notified by RBI
are ineligible under this scheme. Accommodation bills are also
ineligible. Services sector bills are not eligible for rediscounting.
Bank can be both buyer and seller (rediscounter) of these instruments.
In either case it could be single bill or several bills or a portfolio of bills
in the form of single usance promissory note. The RBI states that there
should be a board-approved bill discounting policy in place. Bills should
represent genuine commercial and trade transactions of customers.
Banks should not deal in “without recourse” bills.

TREASURY BILLS:
These are issued by the Reserve Bank of India on behalf of the
Government of India and are thus actually a class of Government
Securities. At present, T-Bills are issued in maturity of 91 days, 182 days
and 364 days. . The minimum denomination can be as low as Rs100, but
in practice most of the bids are large bids from institutional investors
who are allotted T-Bills in dematerialized form. RBI holds auctions for
14 and 364 day T-Bills on a fortnightly basis and for 91 day T-Bills on a
weekly basis. For example a Treasury bill of Rs. 100.00 face value
issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.
91 days T-Bills are auctioned under uniform price auction method where
as 364 days T-Bills are auctioned on the basis of multiple price auction
method. There is a notified value of bills available for the auction of 91
day T-Bills which is announced 2 days prior to the auction. There is no
specified amount for the auction of 14 and 364 day T-Bills. The result is
that at any given point of time, it is possible to buy T-Bills to tailor one’s
investment requirements.

Banks, Primary Dealers, State Governments, Provident Funds,

Financial Institutions, Insurance Companies, NBFCs, FIIs (as per
prescribed norms), NRIs & OCBs can invest in T-Bills.

Discount rate

T-Bill is a discounted instrument and is issued in the form of a

zero coupon instrument at discount to face value redeemable
at par on maturity.

Repayment

The amount on repayment is directly credited to the current

account of the investor held with RBI.

Issue Channels

There are two ways by which T-Bills can be purchased:

Primary Issues:

Through multiple price auctions. Bidders quote prices at discount to the

face value (Rs 100). Multiple bids are allowed. As in the case of G-
Secs, the RBI fixes a cutoff yield at and below which bids get full or
partial allotment.

Secondary Market:

In the secondary market, the trades are directly with counterparty or

through broker intermediary. The market consists of banks, PD’s-
entities which are obliged to bid in the primary auctions of the RBI and
are paid a commission for their services-insurance companies and
mutual funds.

Types of Trade and trading Platforms:

The types of trades are outright purchases/sales.

The trading platforms for G-Sec are NDS-OM (Negotiated Dealing

System-Order matching Segment) and OTC. In addition to NDS, G-Secs
can be traded on stock exchanges in dematerialized form. The trading
platform in stock exchanges is automated and order driven. Trades will
be settled similarly to equities through the concerned stock Exchanges
clearing House. For this purpose:

Day Count Convention is Actual /365

The market price quoted on yield to maturity basis. This can be
converted to price. The price is to be calculated upto maximum of four
decimal places and rounded off to the 4th decimal place

Scenario A: In case yield is given then:

Price= 100

-------------------------------------------------

(1+yield*No of days to maturity)

365*100

Scenario B: In case price is given then

Yield= (100-Price)*365*100

T-Bills are always valued at book value.

Risks on investment in T-Bills

 Price risk. There is price risk due to interest rate

sensiti vity

 Liquidity risk ( in some maturity segments). It should be

ensured that investment in illiquid T-Bills may not be
made for that maturity profi le.
  Counterparty risk. This is minimal due to DVP mode of
sett lement.

 Operati onal risk. This is minimal and it is ensured that

trades are confi rmed on the trade date itself and the
sett lement is done before the ti me prescribed by RBI.

 Reputati on risk. The instances of SGL bouncing has

reduced due to introducti on of Liquidity Adjustment
Facility (LAF) by RBI. RBI has also menti oned the
introducti on of Real Time Gross Sett lement (RTGS) to
avoid such instances

INTER-BANK PARTICIPATION CERTIFICATE(IBPS)

PRODUCT DESCRIPTION

As the name suggests, IBPC’s are instruments which allow banks to

acquire a share of another bank’s loan portfolio and enable banks with
surplus funds to deploy them.The arrangement could be with or
without risk-sharing .Not more than 40% of an advance can be
earmarked for participations.
In IBPC’s of the risk sharing variety, the acquiring bank has no recourse
to the IBPC –issuing bank if the advance underlying the participations is
in arrears or defaulters.

If it is without risk sharing, there is no credit risk exposure to the

underlying advance but only to the IBPC-issuing bank.Thus, the bank
can finance a portion of its loan portfolio by issuing IBPC’s to other
banks. It can also acquire IBPC’s issued by other banks, representing a
part of their loan portfolio. In the first case, the bank reduces the
advances in its book while in the second it has an asset. Banks can issue
IBPC’s only against their standard assets. Also the loan agreement
between the issuing bank and the borrower must explicitly provide for
transfer of the borrower’s liability to another bank.

IBPCs are not transferable instruments.IBPCs are subject to the uniform

code governing inter-bank participation.

IBPC SCHEMES
RISK SHARING

 Minimum maturity 91 days, maximum 180 days.

 Rate of interest is mutually negotiated between the issuer and
buyer.
  Issuing bank should not finance more than 40% of an advance
with IBPC’s at the time of issue.
 In case the advance falls below IBPC’s issued, the issuing bank
must reduce participation to the extent necessary.
 In case the advance is crystallized, the IBPC-issuing bank must
advise the participating banks of the fact. Recoveries from the
brrower and his assets will be shared proportionately among the
issuing bank and the participating banks.
 The issuing bank is not subject to reserve requirements on these
borrowings.
CONDITIONS

The issuing banks should make available all necessary information on

the borrower to participating banks, including its appraisal, security
details, sanction note to its board etc.

 All rights and powers of the participating banks will vest with the
issuing bank.
 The issuing bank has discretion on expanding or waiving the
conditions attached to the loan provided it does not dilute the
obligations or the brrower and/or guarantor under the loan
agreement.
 The issuer will fronted participants in all maters relating to
administering the advance in terms of the loan agreements with
 the borrower .it will have full discretion to (or not to ) exercise its
rights under the loan agreements. However, changes to the loan
agreement which have the effect of varying a borrower’s
obligations require the consent of participants.
 The loan agreement must specifically provide for participations.

NON-RISK-SHARING

 Tenor not to exceed 90 days.

 The rate of interest is mutually negotiated between the issuer and
participating banks.

COMMERCIAL BILLS
PRODUCT DESCRIPTION

Bills of exchange are negotiable instruments drawn by the seller

(drawer) of the goods on the buyer (drawee) of the goods for the value
of the goods delivered. These bills are called trade bills. These trade
bills are called commercial bills when they are accepted by commercial
banks. If the bill is payable at a future date and the seller needs money
during the currency of the bill then he may approach his bank for
discounting the bill. The maturity proceeds or face value of discounted
bill, from the drawee, will be received by the bank. If the bank needs
fund during the currency of the bill then it can rediscount the bill
already discounted by it in the commercial bill rediscount market at the
market
related discount rate.

The RBI introduced the Bills Market scheme (BMS) in 1952 and the

scheme was later modified into New Bills Market scheme (NBMS) in

1970. Under the scheme, commercial banks can rediscount the bills,

which were originally discounted by them, with approved institutions

(viz., Commercial Banks, Development Financial Institutions, Mutual

Funds, Primary Dealer

DISCOUNT RATE

CP’s may be issued at a discount on face value. The parties to contract

are free to determine the discount rate. Discount is calculated on

Actual/365 day basis.

Discount to be calculated on a rear –ended basis. The price is to be
calculated up to a maximum of four decimal places and rounded off to
the 4th decimal place.

Scenario A: In case yield is given then:

Price =

100

PP=== -------------------------------------------------------------

(1 + yield* No. of days to maturity)

-------------------------------------------

365*100

Scenario B: In case price is given then:

Yield= (100- Price)* 365*100

(price *No. of days to maturity)

TANSRACTION PROCESS AND RESTRICTIONS

Investing in primary issues

In a primary issue, the investing bank applies to the issuer along with
payment in terms of the Letter of offer by CP Issuer. Yield offered in
relation to credit rating and secondary market for similar issues should
be checked.The investing bank advises issuer/IPA of its DP details and
IPA issues CP to the DP for its custody on behalf of the investing bank
.IPA issues a Certificate to investing bank conforming compliance of
issuer with the RBI’s and other conditions for issue of CP and also gives
rating and backstop (if any) particulars. Issuer swaps Deal Confirmation
Note with the investing bank

NDS has module to report CP issuance. All CP issues must be reported

on the NDS in two days from completion of the issue, in addition to the
existing RBI.

Investing through secondary marketCurrently, banks are authorized to

invest in CP’s only in demat form .The counterparties may decide upon
the sequence of delivery of funds and securities at time of concluding
the deal in the secondary market.

Buying

In respect of investement through secondary market,the invester bank

has to invest the CP through usual channels similar to other
instruments such as CD.

The dealer has to prepare a deal slip giving details of issuer, face value,
discounted price and maturity. The investor has to receive deal
confirmation from the seller and also send his own deal confirmation to
the seller. He also has to advise the seller the DP details. The seller
must send delivery instruction to its DP for transfer of CP to custody of
banks DP.The investor has to issue RTGS funds transfer instruction or
cheque/pay-order favoring the seller.

Selling

The transaction is done over normal dealing platforms. A deal slip giving
details of issuer, face value, discounted price and maturity and deal
confirmation is prepared and sent to buyer. Deal confirmation should
specifically state that there is no recourse to bank if issuer defaults on
redemption. Simultaneously, the seller receives a deal confirmation
from the buyer .The buyer transfers funds through RTGS to bank (or
bank get cheque / pay order).The buyer advises bank of its DP details
and bank sends delivery instruction to its DP for transfer to the buyer’s
DP.