Call money, notice money, and term money are the different types of short-term borrowing and lending instruments used in the money market. These instruments play a critical role in the efficient functioning of the financial system by facilitating liquidity management for banks and financial institutions.
- Call Money:
Call money is a type of interbank borrowing and lending instrument with a maturity period of up to one day. It is used by banks and financial institutions to manage their short-term liquidity requirements. In a call money transaction, the borrower borrows funds from another bank or financial institution for a day or less, and the interest rate is determined through the demand and supply in the market. The interest rate for call money transactions is typically lower than other short-term borrowing and lending instruments as they have a lower maturity period. - Notice Money:
Notice money is another type of interbank borrowing and lending instrument with a maturity period of between 2 and 14 days. It is called “notice” money because the lender has to give notice to the borrower before withdrawing the funds. In a notice money transaction, the borrower and lender agree on the interest rate and the maturity period of the loan before the funds are transferred. Notice money is typically used by banks and financial institutions to manage their short-term liquidity requirements, especially during the end of the quarter or fiscal year. - Term Money:
Term money is a type of borrowing and lending instrument with a maturity period of between 15 days to one year. It is used by banks and financial institutions to meet their medium-term liquidity requirements. In a term money transaction, the borrower and lender agree on the interest rate and the maturity period of the loan before the funds are transferred. The interest rate for term money transactions is typically higher than call and notice money transactions as they have a longer maturity period.
In conclusion, call money, notice money, and term money are the different types of short-term borrowing and lending instruments used in the money market. These instruments play a critical role in facilitating liquidity management for banks and financial institutions and ensuring the efficient functioning of the financial system.