Scope of India Money Market

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing shortterm monetary requirements of various sectors such as agriculture, finance and manufacturing. The performance of the India money market has been outstanding in the past 20 years. Central bank of the country - the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The intervention of RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the economy. Types of Money Market instruments in India -

Money market instruments take care of the borrowers' short-term needs and render the required liquidity to the lenders. The varied types of India money market instruments are treasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker's acceptance. Treasury Bills (T-Bills) - Treasury bills were first issued by the Indian government in 1917. Treasury bills are short-term financial instruments that are issued by the Central Bank of the country. It is one of the safest money market instruments as it is void of market risks, though the return on investments is not that huge. Treasury bills are circulated by the primary as well as the secondary markets. The maturity periods for treasury bills are respectively 3-month, 6-month and 1-year. The price with which treasury bills are issued comes separate from that of the face value, and the face value is achieved upon maturity. On maturity, one gets the interest on the buy value as well. To be specific, the buy value is determined by a bidding process, that too in auctions. Repurchase Agreements - Repurchase agreements are also called repos. Repos are short-term loans that buyers and sellers agree upon for selling and repurchasing. Repo transactions are allowed only among RBI-approved securities like state and central government securities, T-bills, PSU bonds, FI bonds and corporate bonds. Repurchase agreements, on the other hand, are sold off by sellers, held back with a promise to purchase them back at a certain price and that too would happen on a specific date. The same is the procedure with that of the buyer, who purchases the securities and other instruments and promises to sell them back to the seller at the same time. Commercial Papers - Commercial papers are usually known as promissory notes which are unsecured and are generally issued by companies and financial institutions, at a discounted rate from their face value. The fixed maturity for commercial papers is 1 to 270 days. The purposes with which they are issued are - for financing of inventories, accounts receivables, and settling short-term liabilities or loans. The return on commercial papers is always higher than that of Tbills. Companies which have a strong credit rating, usually issue CPs as they are not backed by collateral securities. Corporations issue CPs for raising working capital and they participate in active trade in the secondary market. It was in 1990 that Commercial papers were first issued in the Indian money market. Certificate of Deposit - A certificate of deposit is a borrowing note for the short-term just similar to that of a promissory note. The bearer of a certificate of deposit receives interest. The maturity

date, fixed rate of interest and a fixed value - are the three components of a certificate of deposit. The term is generally between 3 months to 5 years. The funds cannot be withdrawn instantaneously on demand, but has the facility of being liquidated, if a certain amount of penalty is paid. The risk associated with certificate of deposit is higher and so is the return (compared to T-bills). It was in 1989 that the certificate of deposit was first brought into the Indian money market. Banker's Acceptance - A banker's acceptance is also a short-term investment plan that comes from a company or a firm backed by a guarantee from the bank. This guarantee states that the buyer will pay the seller at a future date. One who draws the bill should have a sound credit rating. 90 days is the usual term for these instruments. The term for these instruments can also vary between 30 and 180 days. It is used as time draft to finance imports, exports.

It depends on the economic trends and market situation that RBI takes a step forward to ease out the disparities in the market. Whenever there is a liquidity crunch, the RBI opts either to reduce the Cash Reserve Ratio (CRR) or infuse more money in the economic system. In a recent initiative, for overcoming the liquidity crunch in the Indian money market, the RBI infused more than Rs 75,000 crore along with reductions in the CRR.

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD) NABARD, an apex development bank, was set up on the recommendations of CRAFICARD Committee on July 12, 1982 under NABARD Act 1981 with a capital of Rs.100 crore contributed by Central Govt. and RBI, with its main office in Mumbai, by merging the Agriculture Credit Deptt and Rural Planning and Credit Cell of RBI and took over the entire functions of Agriculture Refinance and Development Corporation (ARDC). NABARD is managed by Board of Directors consisting of Chairman, Managing Director other directors. NABARD raises funds through National Rural Credit - Long Term operations, National Rural Credit-Establishment fund, through bonds and debentures guaranteed by Central Govt, borrowing from RBI, Central Govt. or any other organisation approved by Central Govt and funds from external sources. It credit functions include providing credit to agriculture, small and village and cottage industries through banks by way of refinance facilities to commercial banks, RRBs, Coop Banks, Land Development Banks and other Financial Institutions like KVIC. Its developmental functions are co-ordination of various institutions, acting as agent of Govt. and RBI, providing training and research facilities. The regulatory functions include inspection of RRBs and Coop Banks, receipt of returns and making of recommendations for opening new branches. EXPORT IMPORT BANK OF INDIA It is apex institution for co-ordinating the working of institutions in India engaged in financing exports and import of goods and services. With initial authorized capital of Rs. 200 crore (increased to Rs.500 and then to Rs.2000 crore) Exim Bank was established on Jan 01, 1982 (and started functioning wef March 01, 1982) under Export Import Bank of India Act 1982, which took over the export finance activities of IDBI. It raises funds by way of bonds and debentures,

borrowing from RBI or other institutions, raising foreign deposits. It undertakes following kind of functions: -direct finance to exporter of goods. -direct finance to software exports and consultancy services. -finance for overseas joint ventures and turnkey construction project -finance for import and export of machinery and equipment on lease basis -finance for deferred payment facility -issue of guarantees -multi-currency financing facility to project exporters. -export bills re-discounting -refinance to commercial banks in India -guaranteeing the obligations.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) SIDBI was established under SIDBI Act 1988 and commenced its operations wef April 02, 1990 with head quarters in Lucknow and branches all over the country, as a subsidiary of IDBI. It took over the IDBI business relating to small scale industries including National Equity Scheme and Small Inds Development fund. The objective of establishment of SIDBI, in particular, is to strengthen and broad-base the existing institutional arrangement to meet the requirement of SSI and tiny industries. Its functions include: -administration of SIDF and NEF for development and equity support to small and tiny industry. -providing working capital through single window scheme -providing refinance support to banks/development finance institutions. -undertaking direct financing of SSI units. -coordination of functions of various institutions engaged in finance to SSI and tiny units.

NATIONAL HOUSING BANK (NHB) NHB, the apex bank for Housing, was established on July 09, 1988 under NHB Act 1987, as a wholly owned subsidiary of RBI with head quarters in New Delhi. The bank was set up with the main purpose of setting up of an institution to operate as a principal agency to promote housing finance institutions and to provide financial and other support to these institutions. NHB can raise sources by issue of bonds and debentures, borrowing from RBI under short term loans and long term operations, borrowing from Central govt and other approved institutions. Its functions are: -promotion and development of housing finance institutions. -refinance to banks and other housing finance institutions for credit facilities granted by them for housing. -inspection of books of accounts of housing finance institutions -technical, administrative and advisory assistance to housing finance institutions. -providing underwriting and guarantee facilities to housing finance institutions. -arranging financing and resources for institutions engaged in housing facilities. -advising Central and other govt. in the matter of housing and housing finance. -collection and publication of information and data relating to housing finance. -maintaining control over corporate housing finance institutions. INDUSTRIAL INVESTMENT BANK OF INDIA (formerly IRBI) IIBI was initially set up as Industrial Reconstruction Corporation Limited during 1971 when it was

renamed Indl Reconstruction bank of India wef Mar 20, 1985 under IRBI Act 1984 to take over the function of IRC. During 1997 the bank was converted to a joint stock company by naming it Industrial Investment Bank of India. Its earlier functions were to provide finance for industrial rehabilitation and revival of sick industrial units by way of rationalisation, expansion, diversification and modernisation and also to coordinate the work of other institutions for this purpose. agricultural and rural requirements. INDUSTRIAL FINANCE CORPORATION OF INDIA Ltd (IFCI) IFCI was established under IFCI Act 1948 during July 1948 as Indias first development bank. The main objective for which IFCI was established, are to make medium and long term credit available to the industrial undertakings and to assist them in creation of industrial facilities. Its functions include: -direct financial support (by way of rupee term loans as well as foreign currency loans) to industrial units for undertaking new projects, expansion, modernisation, diversification etc. -subscription and underwriting of public issues of shares and debentures. -guaranteeing of foreign currency loans and also deferred payment guarantees. -merchant banking, leasing and equipment finance During 1994, IFCI was converted into a joint-stock company and came out with a public issue of shares. It is managed by a Board of Directors. It floated institutions such as TFCI, ICRA etc. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) ICICI was set up during 1955 as a private company with a view to provide support to industry in India by way of rupee and foreign currency loans, particularly the private international investment and World Bank funds to assist the industry in the country in private sector. It functions include: -assistance to industrial undertakings for new projects, expansion, modernisation, diversification etc. in the shape of rupee loans or foreign currency loans. -subscription and underwriting of capital issues -guaranteeing the payment for credits. -merchant banking, equipment leasing and project counselling. It floated a number of institutions successfully which include credit rating agency CRISIL, ICICI Banking Corporation, SCICI (since merged with it) a Mutual Fund etc. During Sept 1998 it changed its name to ICICI Ltd. Of late, it has started providing working capital support to industrial undertakings. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act 1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. Under Public Financial Institutions Laws (Amendment) Act 1976, it was delinked from RBI. IDBI is engaged in direct financing of the industrial activities as well as in re-finance and re-discounting of bills against finance made available by commercial banks under their various schemes. The objectives of this institution are to create a principal institution for long term finance, to coordinate the institutions working in this field for planned development of industrial sector, to provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector. It raises funds by way of market borrowing by way of bonds and deposits, borrowing from Govt. and RBI, borrowing abroad in foreign currency and lines of credit.

Its functions include: -direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernisation etc. -soft loans for various purposes including modernisation and under equipment finance scheme -underwriting and direct subscription to shares/debentures of the industrial companies. -sanction of foreign currency loans for import of equipment or capital goods. -short term working capital loans to the corporates for meeting their working capital requirements. -refinance to banks and other institutions against loans granted by them. Of late, with the reforms in the financial sector, IDBI has taken steps to re-shape its role from a development finance institution to a commercial institution. It has floated its own bank IDBI Bank as also a Mutual Fund. During the financial year 1999-2000 IDBIs total sanctions were Rs.28308 cr (19.2% increase), the total assets were Rs.72169 cr, net worth at Rs.9025 cr, capital adequacy ratio of 14.5%, DER 6.8:1 and PBT Rs.1027 cr (1301 cr previous years). To meet emerging challanges, it has been introducing new products, setting up Mergers & Acquistions Divn, increasing fee based business such as corporate advisory services, credit syndication, debenture-trushtee ship etc., setting up of IT sector subsidiary-IDBI Intech Ltd, venture capital fund, joint ventures and transfer of not less than 51% of IDBIs share capital in SIDBI to PSBs as a result of SIDBI (Amendment) Act 2000 effective from 27.03.2000.