Shubhangi Mane Abin Mathew

 Certificate of Deposits  Treasury Bills  Commercial Paper

MONEY MARKET

 It is a component of financial market  Assets involved for short-term borrowing and lending with original maturities of one year or shorter time frames.  It involves, treasury bills, Commercial Paper, Bankers acceptance, Certificate of Deposit, Federal funds and short lived mortgage and assets back securities  Provides liquidity funding for global financial system.

Certificate of Deposits
With a view to further widening the range of money market instruments and giving investors greater flexibility in deployment of their short-term surplus funds, Certificates of Deposit(CDs) were introduced in India in 1989.

It is a negotiable money market instrument and issued in dematerialized form against funds deposited at a bank or other eligible financial institution for a specified time period.

Eligibility

CDs can be issued by  Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}  All-India Financial Institutions {FIs}

Aggregate Amount
 Banks can issue CDs depending on their funding requirement

 FI can issue CD within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time

 Minimum amount of a CD should be Rs.1 lakh

It can be issued to
 Individuals  Corporations  Companies  Trusts  Associations  NRIs (on non-repatriable basis Such CDs cannot be endorsed to another NRI in the secondary market.)

Maturity Period

 For banks, should not be less than 7 days and not more than one year, from the date of issue.

 FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.

Some important points

 CDs in physical form are freely transferable by endorsement and delivery  CDs in demat form can be transferred as per the procedure applicable to other demat securities  There is no lock-in period for the CDs  Banks / FIs cannot grant loans against CDs.  No buy-back of own CDs before maturity is possible

Characteristics of CD
 It has a specific , fixed term (issue for a month, three months , six months or one to five year)  These are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.  CDs are risk free  It bears a specific maturity date & specific interest rate  Can be issued in any denomination, much like bonds

Amount of interest earn depends upon

 Amount of money invested  Current interest environment  Length of time  Particular bank

A fundamental concept to understand when buying a CD is the difference between annual percentage yield (APY) and annual percentage rate (APR).

Closing of a CD

 Withdrawals before maturity are usually subject to a substantial penalty.  For a five-year CD, this is often the loss of six months' interest.  Institutions mail a notice to the CD holder , shortly before the CD matures requesting directions  Roll over of CD in the absence of any direction.

Treasury Bills
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.

3 Types
Based on Maturity Bills & Utility of the issuance 91 days 182 days 364 days

Benefits Of Investment In Treasury Bills

 No tax deducted at source  Zero default risk being sovereign paper  Highly liquid money market instrument  Better returns especially in the short term  Transparency  Simplified settlement  High degree of tradability and active secondary market facilitates meeting unplanned fund requirements.

 Minimum Amount Of Bid for T-Bills are to be made for a minimum amount of Rs. 25000/- only and in multiples thereof.

 The T-Bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai and are issued at a discounted rate.

 For T-Bills the day count is taken as 365 days for a year.

 Available both in Primary and Secondary market.

Auctions of T-Bill
 Multiple Price Based or French Auction  Uniform Price Based or Dutch auction

Eligible
All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, Provident Funds, trusts, research organisations and even individuals are eligible to bid and purchase T-Bills . State Governments are an exception.

COMMERCIAL PAPER
 A commercial paper in India is the monetary instrument issued in the form of promissory note.

 It acts as the debt instrument to be used by large corporate companies for borrowing short-term monetary funds in the money market.

 An introduction of Commercial Paper in Indian money market is an innovation in the Financial system of India.

 The commercial paper has become effective instrument for these corporate companies to avail the short-term funds from the money

Issuers of Commercial Paper

The issuers of Commercial papers in Indian money market are broadly classified into:  Leasing and Finance Companies  Manufacturing companies  Financial Institutions

Commercial Paper and Credit Rating agencies

Unsecured debt instrument - Maintain relatively higher Credit rating. Not backed by any collateral - high-quality credit ratings

Advantages of commercial papers

1) It is quick and cost effective way of raising working capital.

2) Best way for the company to take the advantage of short term interest fluctuations in the market

3) They are cheaper than a bank loan.

4) As commercial papers are required to be rated, good rating reduces the cost of capital for the company.

5) It is unsecured and thus does not create any liens on assets of the company.

Disadvantages of commercial papers

1) It is available only to a few selected blue chip and profitable companies.

2) By issuing commercial paper, the credit available from the banks may get reduced.

3) Issue of commercial paper is very closely regulated by the RBI guidelines.

Maturity
CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue.

Denominations
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by single investor should not be less than Rs.5 lakh (face value).