Financial Markets | What is Financial Markets: Types of Financial Markets- Instruments of Money Market - Call Money, Notice Money, Commercial Papers, Treasury Bills, Certificate of Deposits, Money Lenders, Indigenous Banks - financebrother

 

Financial Markets

The financial markets is the marketplace where the buying and selling of financial securities happens.
It includes the bullion market, the stock market, the bond market, the foreign exchange market etc.

The financial market is broadly categorized into two types of market.

1.    Money Market

2.    Capital Market

Money Market

The money market is the market for financing the short term capital requirement, generally less than one year.

The money market is categorized into two parts:

1. Organized includes:

• Call Money.
• Treasury Bills.
• Commercial Bills.
• Certificates of Deposit.
• Commercial Papers.

Call Money
Call Money is the type of overnight or daily cash required by the banks to maintain their Cash Reserve Ratio (CRR). Call Money market is the major segment of the total turnover of the money market. There is no requirement for the collateral. This feature makes them very risky and highly volatile.

The recent interest rate for call money transactions is generally around 3.5% to 4.5%.

Notice Money
When, call extent for a day and up to 14 days, then it is called notice money.

Treasury Bills
Treasury Bills are issued by the Central Banks on behalf of the governments to meet their short-term liquidity requirements. Central Banks generally issue treasury bills of three maturities – 91 days, 182 days and 364 days. It is available in India at a minimum amount of INR 25,000 and multiples thereof.

Features of Treasury Bills are as follows:

• They are purely secured, hence the absence of default risk.
• Treasury bills are negotiable investment securities.
• Buying and selling of Treasury bills is effected through a Subsidiary General Ledger (SGL) account. Hence, they are not issued in scrip form.

Commercial Bills
A commercial bill is a short term, negotiable bill of exchange used to finance the short term working capital requirements. It is drawn by the seller (drawer) on the buyer (drawee) as proof of the selling of the goods and services on credit. The buyer agrees to pay for the amount of goods and service within the time as stated on the commercial bill. The maturity generally varies from 30 days, 60 days and up to 90 days.

The seller discounted those bills of exchange from the bank and other financial institutions for meeting their short-term capital requirements and those financial institutions received their money from the buyer (drawee) upon its maturity.

How do commercial bills work?
Company A purchases goods and services from company B of INR 30,000 on credit. Company B drew a commercial bill on Company A as proof of selling goods and services on credit. Company B will discount this bill from the banks or financial institutions on which they receive only 28,000 instead of 30,000 and upon maturity the financial institutions will receive the full 30,000 from Company B.

Certificates of Deposit
A certificate of Deposit is a money market financial product in which banks and financial institutions provide an interest rate premium in exchange for the investors having to deposit a lump sum amount for a certain period of time. It is similar, like Fixed Deposits (FDs) but the biggest differences are they are in bearer form, tradable and transferable.

Key features are as follows:

• Minimum investment amount should be restricted to INR 1 lakhs and multiples thereof up to the limit permitted by the Central Bank.
• Banks have to maintain their Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).
• Permission from the Central Bank is required to issue CD’s. Hence, only those financial institutions and banks are eligible to issue CD’s which are permitted by the Central Bank.

Commercial Papers
Commercial Papers are a money market debt instrument which are issued by corporates for less than 1 year and they are unsecured, hence providing more returns. It helps corporates to meet their short capital requirement generally we call as working capital to perform their business operations.

Corporations have compulsorily applied to a rating agency authorized by the central bank to get the rating for their CP’s as per their riskiness.

Key features are as follows:

• Minimum investment in commercial paper should be INR 5 lakhs and multiples thereof.
• They come up with a minimum maturity of 7 days and up to one year.
• They required a minimum of P2 rating of CRISIL and equivalent from the authorized rating agency.
• Only those corporates can issue CP’s whose tangible net worth is INR 4 crore and have sanctioned limit by the commercial banks.

2. Unorganized:

• Indigenous Banks
• Money Lenders

Indigenous Banks
It is an unorganized system of banking that involves individuals and private firms who act by providing banking services such as providing loans and accepting deposits. It includes self-help groups (SHG’s) who accept the deposits and lending that money to who so ever needed it at a nominal interest rate. It is not regulated by any of the government regulatory authorities.

Money Lenders
They are cash-rich individuals and groups of individuals who lend their money at a certain interest rate to those who require the money against some collateral. It is also not regulated by any of the government regulatory authorities. They work as private lenders.