Introduction
In the Indian financial system, Call Money, Notice Money, and Term Money are important segments of the money market. These markets deal with short-term borrowing and lending of funds between banks and financial institutions. They help financial institutions manage temporary shortages and surpluses of funds and maintain liquidity in the banking system. These money market instruments are mainly used by banks to meet short-term financial obligations such as maintaining the Cash Reserve Ratio (CRR), settlement of payments, and managing daily liquidity needs. The major difference between call money, notice money, and term money is the duration or tenure for which the funds are borrowed or lent.
Meaning of Call Money, Notice Money and Term Money
Call Money, Notice Money, and Term Money refer to unsecured short-term loans provided between banks and approved financial institutions. These transactions are unsecured because no collateral or security is required for borrowing and lending. These money market segments play an important role in ensuring smooth functioning of the banking system. Banks with surplus funds lend money, while banks facing temporary shortages borrow funds for short durations to maintain liquidity and meet regulatory requirements.
Call Money
Meaning of Call Money
Call Money refers to very short-term funds borrowed or lent for one day, usually overnight. These funds are repayable on demand, meaning the lender can call back the money at any time. In practice, however, such transactions are generally settled on the next working day. Call money is mainly used for inter-bank transactions and is considered one of the most important segments of the money market. Since these loans are unsecured, only financially sound and creditworthy institutions are allowed to participate in this market.
Purpose of Call Money
The main purpose of the call money market is to help banks manage their daily liquidity requirements. Commercial banks are required to maintain a minimum reserve balance with the central bank under the Cash Reserve Ratio (CRR). If a bank faces a temporary shortage of funds, it can borrow money from another bank through the call money market. Similarly, banks with excess funds can lend in this market and earn short-term interest income. In this way, the call money market helps maintain liquidity and stability in the banking system.
Call Rate
The interest charged on call money transactions is known as the call rate. This rate is highly volatile because it changes according to the daily demand and supply of funds in the market. Factors such as CRR requirements, RBI monetary policy, government cash balances, and overall liquidity conditions influence the call rate. The call rate is considered an important indicator of liquidity conditions in the banking system. A rise in the call rate generally indicates shortage of funds, while a fall in the rate reflects surplus liquidity in the market.
Features of Call Money
Call money is characterized by its very short tenure of one day or overnight. It is unsecured in nature and mainly used for inter-bank transactions. The market helps banks manage day-to-day liquidity requirements and maintain reserve balances. Since no collateral is involved, the risk level is relatively high, and therefore participation is restricted to financially strong institutions.
Notice Money
Meaning of Notice Money
Notice Money refers to short-term funds borrowed or lent for a period exceeding one day but not more than fourteen days. Unlike call money, notice money is not repayable immediately on demand. Instead, repayment is made after giving prior notice to the borrower. Notice money acts as an intermediate form of borrowing between call money and term money and is used to manage short-term liquidity needs extending beyond one day.
Purpose of Notice Money
The notice money market helps banks and financial institutions manage temporary shortages of funds for short durations ranging from two days to fourteen days. It is useful when banks expect liquidity mismatches for a few days but do not require long-term borrowing. Through the notice money market, banks can maintain reserve requirements and meet short-term payment obligations efficiently.
Notice Money Rate
The interest charged on notice money transactions is known as the notice money rate. This rate is usually close to the call rate but tends to be comparatively more stable because the borrowing period is fixed in advance. The notice money rate is influenced by liquidity conditions, monetary policy, and short-term demand for funds in the banking system.
Features of Notice Money
Notice money generally has a maturity period ranging from two days to fourteen days. It is unsecured in nature and repayment is made after giving prior notice. Notice money is mainly used for short-term liquidity management and helps banks meet temporary funding requirements over a slightly longer duration compared to call money.
Term Money
Meaning of Term Money
Term Money refers to funds borrowed or lent for a period exceeding fourteen days. Generally, the maturity period of term money ranges from fifteen days up to one year. Like call money and notice money, term money is also unsecured, but due to its longer tenure, it carries relatively higher risk. Term money is used by banks and financial institutions to meet short-term to medium-term liquidity requirements.
Purpose of Term Money
The term money market helps banks manage liquidity requirements over a longer period. Banks may borrow term money when they expect sustained pressure on liquidity due to increased loan demand, seasonal business requirements, large payment obligations, or regulatory requirements. Term money allows banks to plan their liquidity needs more effectively over weeks or months.
Term Money Rate
The interest rate charged on term money transactions is known as the term money rate. Since the tenure is longer and the risk is comparatively higher, the term money rate is generally higher than the call money and notice money rates. The rates are determined through negotiations between borrowing and lending institutions based on market liquidity conditions and credit risk.
Features of Term Money
Term money has a maturity period exceeding fourteen days and may extend up to one year. It is unsecured in nature and carries relatively higher risk because of the longer duration involved. Term money helps banks and financial institutions manage short-term to medium-term liquidity planning efficiently.
Comparison between Call Money, Notice Money and Term Money
Call money, notice money, and term money mainly differ in terms of maturity period, repayment conditions, and liquidity management purposes. Call money is used for overnight borrowing and is repayable on demand. Notice money is borrowed for a period ranging from two to fourteen days and requires prior notice for repayment. Term money is borrowed for periods exceeding fourteen days and is repayable on maturity. The risk and interest rates generally increase as the maturity period becomes longer.
Importance of Call, Notice and Term Money Markets
The call money, notice money, and term money markets are extremely important for the banking and financial system because they help maintain liquidity and stability. These markets allow banks to manage temporary shortages and surpluses of funds efficiently. They also help banks maintain reserve requirements, support smooth settlement of financial transactions, and improve the overall functioning of the money market. In addition, these markets assist the Reserve Bank of India in implementing monetary policy and maintaining stability in the financial system.
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 | Low | Moderate | Higher |
| Purpose | Daily liquidity management | Short-term liquidity management | Medium-term liquidity planning |
| Interest Rate | Highly volatile | Relatively stable | Higher and more stable |
Conclusion
Call Money, Notice Money, and Term Money are important components of the Indian money market. They provide short-term unsecured funds to banks and financial institutions for managing liquidity requirements and ensuring smooth functioning of the banking system. Call money fulfills overnight liquidity needs, notice money helps manage short-term funding requirements for a few days, and term money supports liquidity planning for relatively longer durations. Together, these money market segments contribute significantly to financial stability, liquidity management, and efficient functioning of the banking sector.