Call money and certificate of deposit

Call money and certificate of deposit

1. CALL MONEY AND CERTIFICATE OF DEPOSIT

2. CALL MONEY Call money is money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule, nor does the lender have to provide any notice of repayment. Brokerages use call money as a short-term source of funding to maintain margin accounts for the benefit of their customers who wish to leverage their investments . The funds can move quickly between lenders and brokerage firms.

3. CALL MONEY MARKET Call money market is that part of the national money market where the day- to-day surplus funds, mostly of banks, are traded in. The loans made in this market are of a short-term nature, their maturity varying between one day to a fortnight.

4. As these loans are repayable on demand and at the option of either the lender or the borrower, they are highly liquid, their liquidity being exceeded only by cash. The nature of Call money market in different countries varies from each other.

5. Differences in institutional structures account for differences in the nature, participants, purposes or types of transactions in such markets. All, however, have one common feature: They deal in loans which have a very short maturity and are highly liquid.

6. FEATURES OF CALL MONEY Short term finance. The money is lent for 1 day. The interest rate paid on call money is known as the call rate. Schedule and repayment of loan is not fixed. The loan can be called at any time, it is riskier than other forms of loans. It helps in meeting liquidity needs at short notice

7. CALL MONEY MARKET IN INDIA The call loans in India are given : To the bill market For the purpose of dealing in the bullion markets and stock exchanges Between banks, and Frequently to individuals of high financial status in Mumbai for ordinary trade purposes in order to save interest on cash credits and overdrafts.

8. Among these uses inter-bank use has been the most significant and their use on stock exchanges and other markets has been modest. Call loans in India have a maturity anywhere between one day to a fortnight. While the call money market deals in overnight funds, notice money market deals in funds for 2-14 days. Money at call and short notice in the balance sheets of commercial banks is a highly liquid asset. Unlike in other countries, call loans in India are unsecured.

9. Money and credit situation in India every year is subject to seasonal fluctuations. Unlike in other countries, transactions or trading on the call money market is also believed to be characterized by seasonal variations. The seasonal ups and downs are believed to be reflected in the volume of money at call and short-notice, and call money rates at different times of the year.

10. The seasonal nature of the call money market would be reflected in two indicators: A decline in money at call and short notice should be greater in the slack season than in the busy season of a given year. An increase in money at call and short notice should be greater in the busy season than in the slack season.

11. PARTICIPATION Participants in the call money market are Scheduled commercial banks Non-scheduled commercial banks Foreign banks State, district and urban, cooperative bank Discount and Finance House of India (DFHI) Securities Trading Corporation of India (STCI)

12. CALL RATES The rate of interest paid on call loans is known as the call rate. The call rate is highly variable from day to day, and often from hour to hour. It varies from centre to centre also. It is very sensitive to changes in demand for and supply of call loans.

13. CERTIFICATE OF DEPOSIT Certificates of deposit are short term deposit instruments issued by banks and financial institutions to raise large amount of money. This scheme was introduced in July 1989, to enable the banking system to mobilize bulk deposits from the market, which they can have at competitive rates of interest.

14. FEATURES Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit’. Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years). Amount Min: Rs.1 lac , beyond which in multiple of Rs.1 lac

15. Eligibility, Maturity, Issue Price The Certificate of Deposits may be issued at a discount on face value. Banks and Financial Institutions are permitted to issue these on floating rate basis. The interest rate on floating rate Certificate of Deposits will have to be reset periodically. Banks must keep Statutory reserve on the issue price of Certificate of Deposits.

16. Transferability, Loss of Certificate, Security The physical Certificate of Deposits are freely transferable by endorsement and delivery. In case of loss of Certificate of Deposits, duplicate certificate may be issued only after: - A notice is given in at least one news paper. - There has been lapse for 15 days from the date of notice - Investor has to executes an indemnity bond

17. Advantages Certificate of deposits are the most convenient instruments to depositors as they enable their short term surpluses to earn higher return. CDs also offer maximum liquidity as they are transferable by endorsement and delivery. The holder can resell his certificate to another. From the point of view of issuing bank, it is vehicle to raise resource in times of need and improve their lending capacity. The CDs are fixed term deposits which cannot be withdrawn until the redemption date. This is an ideal instrument for the banks with short term surplus found to invest at attractive. Problems Hindering CD Market Absence of secondary mark

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