Steps to convert Call Money market into a pure Inter-bank Market

A four phased exit of non bank institutions from the call money market commenced from May 5, 2001. As part of stage in non-bank institutions, were permitted to lend, on an average up to 85 per cent of their average daily call money lending during 2000-01. This would be followed by reductions in their access to 75 per cent in stage II when the clearing corporation is made fully operational. Subsequently such limits would be reduced to 40 percent and 10 per cent in stage III and stage IV respectively, before affecting a complete withdrawal of non-bank participants from the call money market.

Moreover access to other short term instruments for non-bank institutions were made attractive. In 2000-01, the minimum maturity of certificates of deposit was reduced to 15 days and restriction on the transferability period for CDs issued by banks and financial institutions was withdrawn.

Prudential limits on exposure to call/notice money lending of primary dealers have been issued by RBI. With effect from October 5, 2002, primary dealers will be permitted to lend in call/notice money market up to 25 per cent of their net owned funds (NOF). Access of primary dealers to borrow in call/notice money market would be gradually reduced in two stages. In stage I primary dealers would be allowed to borrow up to 200 percent of their net owned funds as at end-March of the preceding financial year. In stage II primary dealers would be allowed to borrow up to 100 per cent of their net owned funds. The limits under both the stages would not be applicable for days on which government dated securities are issued in the market.

In order to reduce market participants’ reliance on call/notice money market, collateralized borrowing and lending obligation (CBLO) has started operations as a money market instrument through Clearing Corporation of India (CCIL) on January 20,2003.

The RBI has issued prudential norms to reduce the chronic reliance of banks on call money market. With effect from the fortnight beginning December 14, 2002, lending of scheduled commercial banks on a fortnightly average basis should not exceed 25 per cent of their owned funds (paid-up capital and reserves); however banks are allowed to lend a maximum of 50 per cent on any day during a fortnight. Similarly borrowings by scheduled commercial banks should not exceed 100 per cent of their owned funds or 2 per cent of aggregate deposits, whichever is higher however banks are allowed to borrow a maximum of 125 percent of their owned funds on any day during a fortnight.

The repo market was expanded later to non-bank entities holding both current and SGL accounts with the Reserve Bank. The minimum repo tenor was reduced to one day and state government securities were made eligible for repos.

The development of the repo market would help in transforming the call money market into a pure inter-bank market.

Term Money Market:

Beyond the call/notice market is the term money market. This money market is one beyond the overnight tenor, with maturity ranging between three months to one year. In other words, a term money market is one where funds are traded up to period three to six months. The term money market in India is still not developed. The turnover in this market remained mostly below Rs 200 crore in 2001-02. The volumes are quite small in this segment as there is little participation from large players and a term money yield curve is yet to develop. Banks do not want to take a view on term money rates as they feel comfortable with dealing only in the overnight money market. Foreign and private sector banks are in deficit in respect of short term resources; hence they depend heavily call/notice money market. The public sector banks are generally in surplus and they exhaust their exposure limit to term there by constraining the growth of the term money market. Corporates prefer ‘cash credit’ rather than ‘loan credit’ which forces banks to deploy a large amount of resources in the call/notice money market rather than in term money market to meet their demands.

The Reserve bank has permitted select financial institutions such as IDBI, IOCICI, IFCI, HBI, SIDBI, EXIM Bank, NABARD, IDFC and NHB to borrow from the term money market from the three to six months maturity.