Financial Markets

&

Institutions
(An Introduction)
Presentation By:
MANOJ VERMA
Sr. Faculty, (MAIMS)

MBA II Year Major

question

Which specialization field to select?

What are the major areas available?
What are their respective future prospects?
What my parents say?
What friends are saying?
What others are doing?
But
What I want?

FINANCE: An
Introduction

FINANCE
1.

Financial operations and services offer a variety of

opportunities to specialists in finance.

2.

MBAs specializing in finance have a multi

disciplinary approach and a strong conceptual
base. .

Postgraduates in finance control

are trained in
1.
2.
3.
4.
5.

Financial planning,
Decision-making and control,
Corporate finance,
Project finance and
Investment analysis.

Specialized Areas of
Study
1.
2.
3.
4.
5.
6.
7.

Merchant banking,
Equity analysis and research,
Portfolio management,
Issue management,
Treasury management,
International finance,
Retail banking .

Essential Attributes

Creativity
Physically demanding
Ability to handle pressure
Communication skills
Academic skills
Precision & skill
Business acumen

1
1
3
4
5
4
4

Future Prospects
1.
2.

3.

The future prospects for finance professionals

are good in any bank or financial institution.
The growth and promotion opportunities are
good in multinationals as well as the Indian
banks (although the growth and learning
opportunities in the multinational institutions are
fourfold as compared to their Indian
counterparts).
Summing up, the future is indeed bright for the
finance professional.
Related areas of Work
Diversification is possible into Management

Key Attractions ..

It has hold on the entire functional

system
Very relaxed functional area
Better Job Prospects
Comparatively an attractive Work
Culture & Status
Keen Interest in the area

But does the picture really

seems like this?

No, not at all

Challenges are a lot
Intense Competition from other profession like

CA, CS, ICWA and others but skill/talent

is the need of the hour
Comparatively low job opportunities .. But
highly rewarding.
Quite stressful .but enjoyable as you
have special importance

So what to do to have
compatibility with this finance
field
Strong understanding of the fundamentals

of finance
Continuous Skills Up-gradation is a must.
Appropriate selection of sub area of
Interest.
Keen learners attitude is basic requirement
Of course .one needs Patience as well
as Zeal to outperform

Therefore

Follow your Heart and do not join rat

race.
Choose your area of Interest depending
on your strength and traits.
Do not look for lucrative options rather
make your areas lucrative for you.
Do not take into account only money
here.

Welcome u all
to the World of
Finance
&
I wish u all
Good Luck

Unit - I

Indian Financial System and Financial Markets: Organizational structure of

the Indian Financial System,
Major Components Financial Markets;
Financial Institutions/ Intermediaries;
Financial Instruments;
Financial Services,

Primary market
Public Issue, Right Issue and Private Placement,
Underwriters, Book Building Process,
Indian Money Markets and Recent Reforms
Call Money Market,
Treasury Bills Market,
Commercial Bills Market,
Markets for Commercial Paper & Certificate of Deposits,

Secondary Market - Capital Markets in India (Recent development like E-Trading).

Financial System
Financial System of a country consists of a network
of an interconnected system of markets, institutions
and services.
This system contributes to the economic development of
a country.
The main functions of the financial system are to
encourage savings and to transfer them efficiently into
investments.

Functions of a Financial
System
Financial System aims at
establishing a regular, smooth,
efficient and cost effective link
between savers and investors.
The financial system performs the
following functions:
Efficient transformation of Funds.
Creating innovative schemes for

savings & investments.

Components of a Financial
System
Financial Institutions
Financial Markets
Financial
Instruments
Financial Services

Financial Institutions

They are business organizations dealing in financial

resources. They collect resources by accepting deposits
from individuals and institutions and lend them to trade,
industry and others.

They can be Classified as

> Regulatory Institutions RBI, SEBI

> Intermediaries
Banks - Commercial Banks, Cooperative Credit Societies
Non Banks UTI, LIC, GIC
> Non-intermediaries IDBI, IFCI, NABARD, SHCI, DFHI

Financial Markets:

Financial Markets are the centers or arrangements

facilitating buying and selling of financial claims,
assets, services and securities.

They aim at establishing a regular, smooth, efficient

and cost effective link between savers and
investors.

It may be a specific place or location e.g. stock

exchange, or it may be just an over-the-phone
market.

Classification of Financial
Markets

Unorganized or Organized Markets

Money Market and Capital Market

Primary Market and Secondary Market

Broad, Deep and Shallow Financial

Markets

Classification of Financial Markets

Financial Markets

Money Market

Capital Market

Forex Market

Financial Services
Financial Institutions provide a variety of
Services Such as:

Financial and performance guarantees

Deposit Insurance
Hire Purchase
Underwriting
Leasing
Merchant Banking
Factoring
Portfolio Management
Credit Rating
Loan Syndication etc.

Financial Instruments

Financial instruments are financial claims,

financial assets and securities.

It refers to a claim to the payment of certain

sum of money at the end of a specified period.

Various categories of financial instruments are

traded in Indian financial system e.g. Public
sector tax free bonds, CDs, CPs, Bonds, TBs,
etc.

Money Market
It

is a market for short term financial assets that are

close substitutes for money.

Short

term for the purpose is generally taken as a

period up to one year.

Money

Market is basically over the phone market.

Dealings

in money market may be conducted with or

without the help of brokers.

Consists

of many sub markets, e.g. treasury bills, inter

bank call money etc.

Objectives of Money Market

It provides an equilibrating mechanism for evening

out short term surpluses and deficits.

Provides a focal point for central bank intervention

for influencing liquidity in economy.

Provides reasonable access to users of short term

money to meet their requirements at a realistic
price.

Money Market

Call
Money
Market

Commercial
Bills
Market

Treasury
Bills
Market

Short-term
Loan
market

Repo

CD

ICD

CP

Prerequisites for an efficient Money

Market

Large number of participants.

Adequate supply of funds from within the
country and from abroad.
Well diversified mix of money market
instruments.
Active secondary market in these instruments.
A strong central Bank for regulation.
A well organised commercial banking system.
Full scope for play of market forces.
A number of interrelated and integrated sub
markets.
Competition within each sub market as well as
between different sub markets.

Money Market Instruments

Money at call and short notice.(call Loans)

Treasury Bills (TBs)
Bills Rediscounting Schemes (BRS)
Certificate of deposits (CDs)
Commercial Papers (CPs)
Inter Bank participation Certificates(IBPCs)
Securitised Debts
Repos abd Reverse Repos
Options
Financial Futures
Forward Rate Agreements
Swaps
Collateralized Borrowings and Lending Obligations.

Call
Money
Market

CALL MONEY MARKET

Call Money Market is the most sensitive segment of financial

system. Call money is the money borrowed or lent on demand for
a short period.

It is also the most visible market as the day-to-day surplus funds,

mostly of banks, are traded there.

Since its inception in 1955-56 it has achieved tremendous growth

in the volume of activities. Borrowings and lending are for short
duration ranging from overnight to a fortnight.

When money is borrowed or lent for a day, it is known as Call

(Overnight) money. When money is borrowed or lent for more
than a day and up to 14 days , it is known as Notice money.

33

Features of Call Money Market

Part of the National money market.

Day-to day surplus funds mainly of banks are traded.
Short term in nature.
Maturity of these loans vary from 1 to 15 days.
Lent for 1 day: Call money.
Lent for more than 1 day but less than 15 days: Notice
money.
Convenient interest rate.
Highly liquid loan repayable on demand.
In India, CMM provides facilities for inter-bank lending.
Surplus suppliers of funds: UTI, SBI, LIC.
34

Benefits of Call Money Market

1.

Commercial banks, primary dealers (PDs) and other authorised

institutions are allowed to borrow and lend in call market for
adjusting their cash reserve requirements. Banks and other
institutions can even out their day to day deficits and surplus of
money.

2.

Specified FIIs, Mutual Funds and other specified entities are

allowed to operate in Call/ Notice money market as lenders only.
Call/ Notice money market is becoming a pure inter-bank market.

3.

Both the borrowers and lenders are required to have current

accounts with the RBI so that transactions in call market are very
speedy and efficient.

4.

Interest rates in Call/ Notice money market are fully market

determined. Lenders with steady inflow of funds can deploy funds
on short-term basis in call market.

35

Participants in Call Money Market

Those permitted to operate both as lenders and borrowers:

- Commercial Banks both Indain & Foreign
- State Bank of India
- Co-operative Banks
- Discount & Finance House of India (DFHI)
- Securities Trading Corporation of India (STCI)
- Primary Dealers.

Those permitted to operate as lenders:

- LIC
- UTI
- GIC
- IDBI
- NABARD
- specified institutions already operating
- Entities/ corporates/ mutual funds etc.

36

Location of Call Money Market

Indian Call Money Market is mainly confined to big

industrial and commercial centers like Mumbai,
Kolkata, Chennai, Ahemdabad, Delhi and
Banglore.

The Biggest centre in terms of size and buoyancy

of the market are Mumbai and Kolkata.

Major portion of total transactions take place in

Mumbai.
37

CALL MONEY MARKET IN INDIA

Commenced in India after the Ist World War.

Earlier the size was small, few participants from Indian banks and
foreign exchange banks. Indian banks started their operations in
1956.

Market broadened in 1970 as LIC and UTI with huge resources

were permitted to operate in call markets.

In October 1970, State Bank of India (SBI) also entered this market
with its subsidiary banks.

Size of the call market broadened in recent years only.

38

Working in Call Money Market

Transactions in this market include:

- Call loans between banks
- Borrowings and lending by DFHI & STCI
- Lending by LIC, UTI, GIC, IDBI, NABARD
- Call loans to the Bills Market
- Call loans for dealing in Stock Exchanges and Bullion
Market
- Call loans to the individuals of very high status for
trade purposes.
- Lending by the entities which provide an evidence to
RBI
that they have bulk lend able resources with
no outstanding borrowings.

39

Working contd.

Call money market is basically over the telephone market. It

has small number of large operators. Each operator is
financially very sound.

Despite large volume of transactions, direct deals between

lenders & borrowers easily take place. Borrowers & lenders
contact each other over telephone and arrive at a deal after
negotiating the amount of loan and rate of interest.

After this lender issues RBI cheque in favour of borrowing

bank. In return Borrowing Bank issues Call Money Borrowing
Receipt.

On the next day or on the date of reversal of the transaction

the lender returns the duly discharged receipt while the
borrowing bank repays the amount with interest by issuing
RBI cheque.

40

Call loans can be renewed with the mutual consent of the

borrowers and lenders. Such renewals are at the interest
rate mutually agreed. However such renewals are allowed
up to a maximum of 14 days from the original transaction
after which transaction is to reversed.

Commercial Banks, primary Dealers and other financial

institutions are allowed to operate in this market for adjusting
their cash reserve requirement.

Banks and other institutions can event out their day to day
deficits and surpluses of money. Call /Notice money market
are fully market determined.

Volatility in Call Money Market

Reasons:

Large borrowings by banks on reporting Fridays to meet CRR

requirements raise demand for liquid resources and call rates
move up.
When banks extend their credit operations beyond their own
resources, they approach call money market for meeting market
disequilibrium.
When institutional lenders are short of liquidity and instead of
lending they start selling securities for meeting their loan
repayment or maturity of their instruments.
During the quarter ends when advance tax becomes payable by
companies by companies and other institutes, there is a spurt in
call rates.
When stock market is buoyant, call rates goes up and vice versa.
When subscription to government loans opens, the demand for
loans go up and call rates increases. When securities matures
and are encashed by the public and private institutions, supply of
call loans increases and therefore call rates come down.
Liquidity crisis also result in soaring call rates.
42

The market experiences some regular seasonal changes; it is

normally tighter during the busy season (October April) than
during the slack season (May September). It is much tighter in
April.
By its nature, the call money rate is highly volatile, in 1990-91 was
70 and 85 in 1991-92, 1995-96.

43

Measures for reducing volatility of Call Rates

By allowing large number of participants, size of call money market

increases, new instruments have been introduced resulting in
better competition in the market.
Setting up of DFHI as market maker and STCI for trading in
securities have played an important role in reducing fluctuations in
call rates.
Intervention of RBI in controlling speculation by pumping in money
when required daily during recession.
RBI also provides refinance facility to banks in call market.
RBI also advises commercial banks against using call loan money
in normal banking operations.
Cash Reserve ratio (CRR) is an important tool with RBI, which has
often been used for influencing liquidity in the financial system. If
CRR increases credit squeeze and reduces liquidity, thus raising
call money rates and vice versa.
44

Treasury
Bills
Market

Treasury Bills or T-Bills are the promissory notes or a

kind of finance bill issued by the government under
discount for a fixed period, not extending beyond one
year, with a promise to pay the amount stated therein to
the bearer of the instrument.

Treasury Bills are an important instrument of short term

borrowing by the government.

TBs are the used by the govt. for raising short term funds
from institutions or the public for bridging temporary gaps
between receipts ( both revenue & capital) and
expenditure.

TBs are issued for a minimum of Rs. 25,000 and in

multiples thereof.
46

History of T-Bills

TBs were first issued by Bank of England.

In India TBs were first issued in October, 1917 with
the twin objectives of raising more resources for the
First World War efforts of the Govt. and for mopping
up excess liquidity in the economy due to heavy war
expenditure.
Initially TBs were sold by the Govt. by tender for
maturities of 3 months, 6 months, 9 months and 12
months.
Later on, the function of issuing TBs developed on
the RBI after it was set up in 1935.
Sale of TBs to public through auction was suspended
in 1965.
47

Discounting:
When an investor pays less for the security than it will be worth when it
matures, and the increase in price provides a return. This is common to shortterm securities because they often mature before the issuer can mail out
interest checks.
For example:
You pay Rs. 9850 for a 91-day T-bill. It is worth Rs. 10,000 at maturity. What is
its annualized yield?

F P 365
iyt

P
n
$10,000 $9,850 365
iyt

0.0611 6.11%
$9,850
91

48

Features of T-Bills

Highly liquid because money can be realised any time by the

investor.
Since TBs are issued by the RBI and on the behalf of the central
Government there is absolutely no risk of default.
Ready Availability : on any day, commercial bank or other
institutions can invest their temporary surpluses in TBs.
The transaction cost is mainly equal to the difference between
buying and selling rates of DFHI.
Discount rate of TBs does not fluctuate much. During 1995-96 and
the first half of 1996-97, the yield of TBs remained at around 12-13
percent.
For measuring Statutory Lending Ratio (SLR) of commercial banks.
These are an eligible security.
Value of a financial instrument depends on its liquidity, safety and
yield. TBs are not only highly liquid and highly safe, but the yield on
TBs also varies within a very narrow range. As a result, there is
very little scope of capital depreciation in case of TBs.

49

Participants of TB Market
The
main
participants
The
Reserve
Bank of India.in 14-day, 28-day, 91day,
and
364-day
are:
The
State
Bank of India.
Commercial Banks.
State Governments and other approved bodies.
Discount and Finance House of India (DFHI).
The Securities Trading Corporation of India (STCI).
Other Financial institutions such as LIC, UTI, GIC,
NABARD, IDBI, IFCI and ICICI, etc.
Corporate entities.
General public.
Foreign Institutional Investors (FIIs) from April 29, 1998.
50

Types of Treasury Bills

Ordinary T- Bills:
These are issued to public, banks and other institutions for
enabling the central bank to raise resources for its short term
financial needs.
2. Ad Hoc T-Bills:
These are issued in favour of RBI only. These are not sold
through tenders or auctions. The RBI is authorized to issue
currency notes against it. These are not marketable in India
but the investor can sell them back to RBI.
The purpose behind it is:
Replenish cash balance of the Central Government.
Provide an investment outlet for the state government,
semi government departments and foreign central bank.
Discount Rate Fluctuations caused by state government
intervention are avoided.
1.

51

Periodicity of T-Bills

Initially towards First World War, T-Bills of 3,6,9 and 12 months.

After the commencement of RBI in 1935, 2 types of Bills were
there:- TAP Bills and Intermediate bills, both of 91 days maturity.
In Nov. 1986, Chakraborthy Committee recommended 182 days TBills because 91 days T-Bills failed to yield.
In May 1997, RBI introduced 14 days T-Bills.
On Oct. 21, 1997, 28 days T-Bills were introduced.
During 1996-97, RBI discounted 91 days Ad Hoc T-Bills issued on
the behalf of RBI.
14, 91, 182 and 364 days T- Bills are issued on weekly and
fortnightly auction basis; 182 T-Bills on Wednesday preceding nonreporting Friday and 364 on Wednesday preceding reporting
Friday.
From April 1, 1998, all T-bills are issued on a fixed notified amount
by RBI.

52

Procedure of issuing T-Bills

RBI issues 91 days T-Bills on tap basis throughout the week. All the other TBills are auctioned on fortnightly basis.
RBI notifies it with the help of Press Releases in newspapers mentioning
the date of auction and the last date of submission of tenders.
Investors are permitted to submit more than one bid through separate
tenders.
Within 24 hrs. of announcement, the successful bidders are expected to
collect letter of acceptance from RBI and deposit back with a cheque on
RBI.
Commercial Banks can also deals on the behalf of investor clients.
Purchases and sales of TBs take place through the Subsidiary General
Ledger (SGL) Account maintained by RBI for investors like Commercial
Banks, DFHI, STCI and other financial institutions. Investors who do not
enjoy SGL account facility, buy and sell TBs through DFHI.
Purchaser of TB from DFHI tenders at the DFHI counters, a cheque is
drawn on RBI for the purchase price. In return, he collects a duly signed
SGL Transfer Form from DFHI.
53

In case of sale to DFHI, the seller tenders at DFHI counter a duly

completed and signed SGL Transfer Form as transferor. In
return, he collects from DFHI a cheque drawn on RBI.

Yield on T- Bill or T-Bill Rates

It is the rate of discount at which T-Bills are sold by the RBI. Because
of high liquidity and high safety, treasury bill rate is generally the
lowest rate of interest in the entire interest rate structure in the
country. The effective yield depends on:
The rate of discount.
Difference between the price at which they are sold and their
redemption value
Time period of maturity.

54

Importance of T-Bills
Importance to the Issuer / Government
For raising short term funds for meeting temporary budget
deficits.
Govt. can mop up excess liquidity in the economy through
issue of TBs.
Its issuance cannot be monetised and their issue does not
lead to inflationary pressure.
Importance to the Purchaser / Investor
Liquidity at short notice because DFHI offers daily twoway
quotes, they can be discounted from RBI.
Investments are kept in non-earning cash to the minimum
and supplementing it with TBs which earn a return.
Eligible securities for determining statutory liquidity
requirement (SLR) of banks. Most investments in TBs is by
commercial banks.
Instrument of meeting mismatch between realisation of
assets and payments on account of liabilities.
Provides complete safety regarding the payment of interest
and the repayment of principal.

55

COMMERCIAL BILLS
MARKET
(C.B. MARKET)

A bills of exchange is a written instrument containing as unconditional

order, signed by the maker (called drawer), directing a certain person (called
drawee) to pay a certain sum of money specified in the instrument, only to, or
to the order of, a certain person (called payee), or to the bearer of the
instrument on demand or at the expiry of the specified period. It is a
negotiable instrument. Its liquidity is next to cash, call loans and treasury bills.

Characteristics of Bills of Exchange:

Large number of transactions supported by genuine trade bills.

Well established and well spread market.

Both borrowers and lenders must subject them to strict financial disciplines.

Commercial banks may use Bills of exchange for providing credit to their
customers.

Market have abundant facilities for rediscounting the bills.

Bills are discounted and rediscounted large number of times.

Central bank should be ready to rediscount the bill throughout the year.

Intermediaries to operate with fine margin and help in smooth functioning of

bills market.

Efficient credit investigating agencies to investigate the creditworthiness of

various parties.
57

Types of Bills of Exchange

1.
2.

3.

4.
5.

6.

7.

Demand Bill or Sight Bills These are the bills which are
immediately payable on presentation to the drawee.
Usance bill or time bill Bills payable on the date specified on
the bill or immediately after the expiry of time period mentioned on
the bills.
Clean Bills In case documents accompanying the bill are to be
delivered against acceptance of the bill by the drawee, it is a
clean bill.
Documentary Bill Bills accompanied by documents of the title
of the bill such as railway receipt, bill of lading, etc.
Inland Bills These bills are drawn or made in India and are
payable in India and drawn on any person who is resident in
India.
Foreign Bills It includes bills drawn outside India and payable
in India by a party outside India, drawn outside India and payable
outside India by a resident or non resident of India and bill drawn
in India but made payable outside India.
Export Bill Bills drawn by exporters on a party outside India.
58

8.
9.
10.
11.

12.

Import Bill Bills drawn on importers in India by the

exporters outside India.
Hundis Indigenous bills of exchange and promissory
notes for financing agriculture and inland trade.
Genuine Trade Bill Bills of exchange by genuine trade
or commercial transactions of purchase and sale.
Accommodation Bills or Kite Bills or Wind Bills Bills
created by borrowers or lenders simply to help each other,
without any trading transactions backing the bills.
Supply Bills a bill drawn by a supplier or a contractor on
the government or semi government departments for the
supplies made to such departments.

59

Process of Bill writing and Discounting

A genuine trade bill comes into existance when a seller sells goods
to buyer.
The seller needs money on completion of the sale and buyer would
like to pay out of the earnings of his purchase.
To satisfy the requirement of both parties, the seller draws a bill of
agreed maturity on buyer who accepts the bill, thus acknowledging
his liability to pay on due date.
The buyer can take the accepted bill to the bank for discounting
within his sanctioned limit, or to an NBFC for outside consortium
discounting and receives ready cash in return.
The difference between bill value of the sale transaction and the
amount received by seller is known as discount charge which is
calculated at a rate percent per annum on the maturity value.

60

Importance of Commercial Bill Market

Bill financing is the prevalent method of meeting credit needs

of trade and industry.
These are self liquidating in character because they have a
fixed tenure.
These have high level of liquidity next only to cash, call
loans and treasury bills
It imposes financial discipline on borrowers as its payment
must be made on the due date of the bill.
Banks can meet their short term liquidity requirements by
rediscounting these bills.
Existence of bill market enables banks and other institutions
to invest their surplus funds profitability by selecting
appropriate maturities.
Imparts flexibility to money market by evening out liquidity
with bankers.
61

Yield in Commercial Bills Market

62

Bills Rediscounting Scheme (BRS)

In 1968, the Dahejia Committee reiterated that commercial
banks, industry and trade should develop the practice of
issuing usance bills which should have discounting facilities.
In Nov., 1970, the RBI, on recommendation of Narasimhan
Committee, introduced the Bills Rediscounting Scheme
(BRS) which is also known as New Bills Market Scheme
(NBMS). It continues till now. In the beginning, at the time of
rediscounting of bills, the banks are required to lodge all such
bills with RBI. To minimize these difficulties, the RBI has
dispensed with the requirement of lodgment of eligible bills up
to the face value of Rs. 10 lakh. RBI has now permitted banks
to issue derivative usance promissory notes on the strength
of underlying bills.
63

Objectives of BRS
Objectives :
1.
Creation of an instrument of credit linked with the
genuine transactions of purchase and sale.
2.
Creation of money market instrument for evening
out liquidity in the banking system.
3.
Developing a subsidiary market in commercial bills
and making the money market more deep and
wide.
4.
Creation of an instrument which banks could get
rediscounted with other financial institutions.
5.
Creation of an instrument of credit which
encourages a more disciplined use of bank credit
than that practiced under usual cash credit and
book debt loan.
64

Bills eligible for rediscount

All scheduled commercial banks are eligible to rediscount the eligible
bills with the RBI and other approved institutions. Rediscounting
can be done with the help of following conditions:

Genuine trade bill i.e. it should arise out of a genuine transaction of

purchase and sale.

The nature of transaction and the particulars of the documents of

title of goods relating to the transaction should be indicated on the
face of the bill.

Bill has to be drawn on, and accepted by, the purchasers licensed
scheduled bank.

In case the purchasers bank is not a licensed scheduled bank, the

bill has to, in addition, bear an endorsement of a licensed
scheduled bank.

Joint bills i.e. the bills drawn on the buyer and his bank jointly, and
bills jointly accepted, are also eligible for rediscounting.
65

Eligible bill should have usance of not more than 90 days. In

exceptional cases, where the bills has usance upto 120 days, it can
be rediscounted only if the remaining maturity period does not
exceed 90 days at the time of its presentation for rediscounting.
Multani and accommodation bills are not eligible for rediscounting.
Banks enjoy refinance facilities against commercial bills throughout
the year.
The bill should have atleast two good signatures, one of which has to
be of a licensed scheduled bank.
Bills arising out of sale of commodities covered by the RBI under
selective credit controls, are not eligible for rediscounting.
Bills drawn by textile mills, and traders and dealers in textiles are
eligible for rediscount provided usance of the bill does not exceed 60
days.

66

Reasons of slow success of NBMS/ BRS

Reluctance by businessman in India due to disciplined payment on maturity

date.
Several monopolists regard it against their prestige to accept bills.
NBMS had limited coverage as sensitive commodities are excluded out of it
by RBI.
Credit rating agencies were non-existing before the set up of CRISIL and
ICRA.
Stamp duty on bills and non- availability of stamp papers. Later stamp duty
was removed.
Essential condition of clearance of bills is not easy for small businessmen.
Very poor response of public sector undertakings to NBMS.
Supplies to government departments were not initially covered, though the
coverage of NBMS was extended to them in 1971.
Commercial banks generally did not rediscount the bills but directly reach
RBI whenever there was urgent need of funds and/or bill rediscounting
proved cheaper than call loans.
67

Rediscounting procedure by banks

Commercial banks are allowed to draw derivative usance

promissory notes for maturities upto 90 days on the strength of
commercial bills discounted by their branches.
In case of original discounting, the discounter bank issues a
derivative promissory note in the favor of approved institutions.
The discounting bank holds the bill till the date of maturity.
As the bill matures, the drawer bank should ensure that these
bills get deleted from the cover and are replaced by fresh
eligible bills.
The discounting bank maintains a register containing true and
complete details of usance bills held in support of derivative
promissory notes.

68

Types of Bill market rates

1.
2.
3.
4.
5.
6.

Bazar Bill rate : the rate at which shroffs and other money lenders used to
discount bills of small traders.
SBI hundi rate : SBI used to discount hundis to indigenous bankers.
Commercial banks bill finance rate : rate at which commercial banks can get
bills discounted from each other.
SBI discount rate : At this rate SBI discounts first class usance bills.
Bank rate : The rate at which the RBI rediscounts eligible bills from commercial
banks.
DFHI rate : the rate at which the DFHI buys and sells eligible bills from
commercial banks and other approved institutions. DFHI quotes both for buying
and selling rates.

69

Computation of yield

70

CERTIFICATE OF DEPOSITS
(CD)

Certificates of Deposits (CD)

A CD is a negotiable promissory note, secure and short term ( up to a year) in nature.
A CD is issued at a discount to the face value, the discount rate being negotiated
between the issuer and the investor. It is a receipt given to the depositor by a bank
or any other institution entitled to issue CD for funds deposited with it.
(DEFINITION)
CDs are issued by Banks, when the deposit growth is sluggish and credit demand is
high and a tightening trend in call rate is evident. CDs are generally considered high
cost liabilities and banks have recourse to them only under tight liquidity conditions.

CDs are unsecured, negotiable, short term instruments in bearer form, issued by
commercial banks and developmental financial institutions.
CDs were introduced in June 1989.
Only scheduled commercial banks excluding RRBs and local area banks were
allowed to issue them initially.
FIs were permitted to issue CDs within umbrella limit fixed by RBI in 1992.
CDs are time deposits of specific maturity similar to fixed deposits.
The biggest difference is that CDs are in the bearer form, transferable and tradable
while FDs are not.
CDs are issued by banks during tight liquidity periods, at relatively high interest
rates.
CDs are issued at discount to face value.
72

Features of CDs

CDs can be issued to individuals, corporations,

companies, trusts, funds, associates, etc.
NRIs can subscribe to CDs on non-repatriable basis.
CDs attract stamp duty as applicable to negotiable
instruments.
Banks have to maintain SLR and CRR on the issue
price of CDs. No ceiling on the amount to be issued.
The minimum issue size of CDs is Rs.5 lakhs and
multiples thereof.
CDs are transferable by endorsement and delivery.
The minimum lock-in-period for CDs is 15 days.

73

Guidelines issued by Reserve Bank of India

1.
2.
3.
4.
5.
6.
7.

8.

These can be issued by scheduled commercial banks and specified All

India Financial Institutions, namely, IDBI, ICICI, IFCI, SIDBI, IRDA, etc.
It can be issued to individuals, associations, companies, corporations,
trust funds, etc.
These attract stamp duty as applicable to negotiable instruments.
Banks have to maintain SLR and CRR on issue price if CDs. There is no
ceiling on the amount of CDs to be issued.
The minimum amount for which a CD was permitted to be issued was
also reduced from Rs. 25 lakhs to Rs. 5 lakhs.
These can be now transferred to any time after issue, following the
prescribed rules.
On October 21, 1997, the minimum ize of issue of CDs to a single
investor was reduced from Rs. 10 lakhs to s. 5 lakhs. Cds above Rs. 5
lakhs can be issued in multiples of Rs. 1 lakh.
Initially, the maximum amount for which a bank was permitted to issue a
CD was fixed at 1% for its fortnightly aggregate average deposits. This
limit was raised to 10% in 1992 and was subsequently abolished.
74

Yield on Commercial Deposits

75

COMMERCIAL PAPER
(CP)

CP-Introduction

Commercial Paper (CP) is an unsecured money

market instrument issued in the form of a promissory
note. These are debt instruments issued by corporate
for raising short-term resources from the money
market. CP was introduced in India in 1990 with a
view to enabling highly rated corporate borrowers to
diversify their sources of short-term borrowings and to
provide an additional instrument to investors.

77

Features of CP
CP can be issued for maturities between a minimum of 15 days and a
maximum upto one year from the date of issue. If the maturity date is a
holiday, the company would be liable to make payment on the immediate
preceding working day.
CP can be issued only in a dematerialised form through any of the
depositories approved by and registered with SEBI.CP can be held only in
demateralised form.
CP will be issued at a discount to face value as may be determined by the
issuer.
Banks and All-India financial institutions are prohibited from underwriting or
co-accepting issues of Commercial Paper.
On maturity of CP, the holder of the CP will have to get it redeemed through
the depository and receive payment from the IPA.
CP may be issued to and held by individuals, banking companies, other
corporate bodies registered or incorporated in India and unincorporated
bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors
(FIIs). However, investment by FIIs would be within the 30 per cent limit set
for their investments in debt instruments.

78

Participants of Commercial Paper

Market
Participants in Issue of commercial paper
Highly rated corporate borrowers, primary dealers (PDs) and
satellite dealers (SDs) and all-India financial institutions (FIs)
which have been permitted to raise resources through money market
instruments under the umbrella limit fixed by Reserve Bank of India
are eligible to issue CP.
A company shall be eligible to issue CP provided - (a) the tangible net
worth of the company, as per the latest audited balance sheet, is not
less than Rs. 4 crore; (b) the working capital (fund-based) limit of the
company from the banking system is not less than Rs.4 crore and (c)
the borrowal account of the company is classified as a Standard Asset
by the financing bank/s.
CP

may be issued to and held by individuals, banking companies,

other corporate bodies registered or incorporated in India and
unincorporated bodies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs). However, investment by FIIs would be
within the 30 per cent limit set for their investments in debt
instruments.
79