Debt

Commercial Paper & Treasury Bill A Commercial Paper (CP) is an unsecured, short-term debt instrument issued by a Corporation, in the form of promissory note or in dematerialised form, typically for meeting short-term liabilities. COMMERCIAL PAPER A Commercial Paper (CP) is A money-market instrument Issued by corporates and Financial Institutions To garner money from the market To meet short term needs. When & why was it introduced in India? It was introduced in India in 1990. It was aimed at providing high rated corporates with a borrowing option. So while they could borrow from a bank, now with the help of a Commercial Papers, they could also borrow from the open market. Since Commercial Paper is used to borrow directly from the market, the rate of interest is lesser as compared to the banks. THUS… A commercial paper is a lower cost alternative to borrowing from a bank. However not all organisations are in a position to issue Commercial Papers. Only reputed organisations whose papers have a good rating can borrow directly through Commercial Papers and save money. LETS TAKE AN EXAMPLE….. ABC Group are the owners of a large retail stores. They want to raise funds from the market to purchase merchandise. If they go to a bank for a loan, they would have to pay 10% interest on the loan. But from the open market they could perhaps get the loan at only 7%. Hence by resorting to an instrument like Commercial Papers, the organization gains 3%. Therefore By issuing Commercial Papers the organisation borrows directly from investors and by-passes the banks. As a result, it gets to borrow at a lower rate from the market as compared to what the banks would have charged. This process is also called Financial Disintermediation or in other words getting rid of the mediator. So who is eligible to issue Commercial Papers? Corporates Primary dealers Satellite Dealers All-India Financial Institutions (FIs) And who can invest in CPs? Individuals Banking companies Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. For what maturity periods are CPs issued…..? CPs can be issued for maturities between a minimum of 15 days and a maximum of up to one year from the date of issue. 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). Therefore it is used to fund the working capital or current requirements of organisations. However, one important point to note is that the borrowed amount can only be used to fulfill current requirements. It is not meant be used for purchase of fixed assets, such as a new plant. Commercial Papers is usually issued at a discount from face value and rarely range longer then 270 Days. It is mandatory for CPs to be credit rated by approved Credit Rating Agencies as may be specified by RBI from time to time. Treasury Bills What Treasury Bills are… Treasury Bills or T- Bills are exactly the same as CPs. Except that while CPs are issued by corporates, T- Bills are issued by the Government of India for financing its working capital needs. T-Bills issued by Reserve Bank of India are for 91 Days, 182 Days and 364 Days T-bills. T-Bills are Zero Coupon securities and are issued at discount and redeemed at face Value on Maturity. T-Bills are Secured.

Certificate of Deposits CDs or Certificates of Deposits are Financial Instruments. CERTIFICATES OF DEPOSIT What do CDs actually mean? Who issues them?? Who subscribes to them??? CERTIFICATES OF DEPOSIT Sunil wishes to borrow Rs. 40 Lakhs for his new business venture. He goes to his bank to ask for a loan. But though the bank agrees to provide a loan, it realizes that it has only Rs. 30 lacs at present. Now the bank does not wish to lose him to another bank. So the bank asks him to come back later to collect the loan amount. CERTIFICATES OF DEPOSIT So how does the bank provide the additional Rs.10 lakhs? CERTIFICATES OF DEPOSIT The bank has corporate relationships from whom they can borrow. In order to borrow, they issue ‘Certificates of Deposit’ to these corporate relationships. Obviously the rate of interest offered by the bank to the corporate institutions would be higher than regular fixed deposits. Thus money comes into the bank and is in turn offered to Sunil. CERTIFICATES OF DEPOSIT CDs, thus, become the financial instrument issued by banks at a higher interest rate than Fixed Deposits to entice corporates to park money with them in order to meet a lending need. A CD bears: a maturity date, generally range for 7 days to onr year. Financial Institution’s can issue CD’s for a period not less than one year and not exceeding 3 years from the date of issue. a specified interest rate, and can be issued for Rs.1 lakh and in multiple of Rs.1 Lakh thereafter. CERTIFICATES OF DEPOSIT To Sum Up CD’s are a negotiable money market instrument and issued in dematerialized form or as a promissory note against funds deposited at a bank. CD’s can be issued by scheduled commercial banks and financial institutions permitted by Reserve Bank of India. CD’s are rated by approved rating agencies. (Example- CARE, ICRA, CRISIL and FITCH)

CALL MONEY On a lazy Sunday night you and your family are relaxing on a couch watching your favorite TV show. Suddenly, someone rings your door bell. You open the door and it’s your long distance relatives who have made a surprise visit. While you can’t show your displeasure but you still welcome them and offer a cup of tea or coffee. However, your wife whispers to you that there is no milk at home and all the neighborhood shops would be closed. So, now you are left with no option but knock your neighbour\’s door to borrow some milk for your guests with an intention to return it next day once the shop reopens. At least your friendly neighbour becomes your savior and saves you from embarrassment….. Similarly, in the money market, call money serves as a savior to banks facing temporary cash crunch and lends them overnight money to avert the shortage situation… What  is  Call Money…? Call money relates to day-to-day funds requirements of banks. When one bank faces a temporary cash crunch, it borrows from another bank that has surplus cash for a period of one to fifteen days. Typically, banks borrow to bridge temporary shortfall in funds. This borrowing and lending is on unsecured basis. When money is lent for one day or on overnight basis it is known as “Call Money” and, if it exceeds one day to 14 days is referred to as “Notice Money” and “Term Money” refers to borrowing/lending of funds for fixed tenure for 15 days upto 1 year. WHO CAN PARTICIPATE …? The call money market is the most important segment in the Indian money market. In this market, only Schedule Commercial Banks, Co-operative Banks(other than Land Development Banks), Payments Banks, Small Finance Banks and Primary dealers (PDs) are allowed to both borrow and lend. WHY DOES BANK BORROW MONEY WHEN THEY LEND MONEY TO EVERYONE…? Banks have to maintain a mandatory minimum cash balance known as the cash reserve ratio (CRR). They also have to maintain sufficient liquidity for their day-to-day operations. Also, banks sometimes need to borrow funds to meet a sudden demand which may arise due to large cash withdrawals during festivals, long bank holidays and cash supply at ATMs etc. Any surplus / shortfall could be met through call money route. WHAT IS ITS IMPACT…? The interest paid on call money is called call rate. Eligible participants are free to decide on what the interest rates would be. This is very liquid money market and is the main indicator of the day to day interest rates. If the call money rates fall, this means there is a rise in the liquidity and vice versa. Also, the call money rates have implications on the monetary policy. If the call rates consistently trade at levels which are not in line with the RBI’s policy rates then RBI may conduct Open Market Operations (OMO) to infuse or suck liquidity from the market. Simply put, call money serves the purpose of meeting the short-term liquidity requirement of banks.