In the Indian financial system, Call Money, Notice Money and Term Money are important segments of the money market. These markets deal with very short-term funds and are mainly used by banks and financial institutions to manage their liquidity requirements.
Meaning of Call Money, Notice Money and Term Money
Call Money, Notice Money and Term Money represent unsecured lending and borrowing of funds for short durations between banks and other eligible financial institutions. These transactions are mainly undertaken to meet temporary mismatches in funds, such as daily cash requirements or regulatory needs like CRR maintenance.
They differ mainly on the tenure (duration) for which funds are borrowed or lent.
Call Money
What is Call Money?
Call Money refers to very short-term funds that are borrowed or lent for one day (overnight). In this market, funds are repayable on demand, which means they can be “called back” at any time, but practically they are for one working day.
Call Money is unsecured, meaning no collateral or security is required for these transactions. Because of this, only highly credit-worthy institutions are allowed to participate.
Purpose of Call Money
The main purpose of the call money market is to help banks manage day-to-day liquidity. For example, if a bank faces a shortage of funds to meet its CRR requirement at the end of the day, it can borrow funds in the call money market. Similarly, a bank with surplus funds can lend in this market to earn short-term interest.
Participants in Call Money Market
Participants in the call money market are regulated by the RBI. These generally include:
- Scheduled Commercial Banks
- Cooperative Banks
- Primary Dealers (PDs)
Non-bank institutions are generally not allowed to borrow in the call money market but may be allowed to lend under RBI guidelines.
Call Rate
The call rate is the rate of interest at which call money is borrowed or lent. It is highly volatile because it depends on daily demand and supply of funds. Factors such as CRR requirements, government cash balances, RBI liquidity measures, and overall market conditions influence call rates.
The call rate is considered an important indicator of liquidity conditions in the banking system.
Key Features of Call Money
- Tenure: Overnight (1 day)
- Nature: Unsecured
- Participants: Banks and Primary Dealers
- Risk: Higher due to no collateral
- Role: Day-to-day liquidity management
Notice Money
What is Notice Money?
Notice Money refers to short-term funds borrowed or lent for a period exceeding one day but up to 14 days. Unlike call money, notice money is not repayable on demand. Instead, repayment is done after giving a prior notice, usually of one day.
Thus, notice money is slightly longer in duration than call money but still falls within the short-term money market segment.
Purpose of Notice Money
Notice money helps banks manage short-term liquidity needs that extend beyond one day but do not require longer-term funding. It is useful when banks anticipate temporary mismatches in funds over a few days.
Participants in Notice Money Market
The participants in the notice money market are largely the same as those in the call money market:
- Scheduled Commercial Banks
- Cooperative Banks
- Primary Dealers
Participation is again regulated by the RBI to maintain stability and reduce credit risk.
Interest Rate in Notice Money
The interest rate in the notice money market is called the notice money rate. It is usually slightly lower than or close to the call money rate, depending on liquidity conditions. Since the tenure is known in advance, the rate is comparatively more stable than the call rate.
Key Features of Notice Money
- Tenure: More than 1 day and up to 14 days
- Nature: Unsecured
- Repayment: After giving notice
- Risk: Similar to call money but marginally lower
- Role: Short-term liquidity management
Term Money
What is Term Money?
Term Money refers to funds borrowed or lent for a period exceeding 14 days. Generally, the maturity of term money ranges from 15 days to one year, though most transactions are for shorter durations within this range.
Like call and notice money, term money is also unsecured, but due to the longer tenure, it carries higher credit risk.
Purpose of Term Money
Term money is used to meet short-term to medium-term funding requirements. Banks may use term money for planning liquidity over a few weeks or months, especially when there is expected pressure on funds due to loan demand or regulatory requirements.
Participants in Term Money Market
Participants in the term money market include:
- Banks
- Financial Institutions
- Primary Dealers
Due to higher risk and longer duration, participation is more selective and governed by RBI guidelines.
Interest Rate in Term Money
The interest rate on term money is called the term money rate. It is generally higher than call and notice money rates, reflecting the longer tenure and higher risk involved. Rates are negotiated between the borrowing and lending institutions.
Key Features of Term Money
- Tenure: Above 14 days (up to 1 year)
- Nature: Unsecured
- Risk: Higher than call and notice money
- Role: Short-term funding and liquidity planning
Comparison between Call Money, Notice Money and Term Money
| Basis | Call Money | Notice Money | Term Money |
|---|---|---|---|
| Tenure | 1 day (overnight) | 2 to 14 days | Above 14 days |
| Repayment | On demand | After notice | On maturity |
| Nature | Unsecured | Unsecured | Unsecured |
| Risk Level | Lower (very short term) | Moderate | Higher |
| Interest Rate | Highly volatile | Relatively stable | More stable but higher |
Conclusion
Call Money, Notice Money and Term Money together form the core of the short-term money market in India. They enable banks and financial institutions to manage liquidity efficiently and ensure smooth functioning of the financial system.
In simple words, call money meets one-day needs, notice money meets a few-days needs, and term money meets slightly longer short-term needs of banks.