A SUMMER TRAINING REPORT

ON

Money market and its instruments

SUBMITTED IN PARTIAL FULFILLMENT OF THE TWO YEARS MASTERS DEGREE IN BUSINESS ADMINISTRATION

Submitted by Ishfaq Ahmad Dar

Reference no:-D1012SSISBE-A10065(DEL-6A-DA-1222)

IIPM

NEW DELHI

Declaration

I ishfaq ahmad dar do hereby declare that the project report entitled³money market and its instrument in investment´ being submitted to is my own piece of work and it has not been submit INDIAN INSTITUTE OF PLANNING AND MANAGEMENT (IIPM)ted to any other institute or published at any time before.

Ishfaq ahmad darreference No: - D1012SSISBE-A10065(DEL-6A-DA-1222)

IIPM New Delhi

Acknowledgement

This report bears the imprint of many people. Right from the experienced staff of Zonal Office The Jammu & Kashmir Bank LTD Srinagar , to the staff of Indian institute of planning and management (IIPM) New Delhi without whose support and guidance  would have not got the unique opportunity to successfully complete  my internship in this esteemed organization. I take this opportunity to express my deep gratitude to all the employees of Zonal Office The Jammu & Kashmir Bank LTD Srinagar  . Also I am Indebted for the rich guidance, knowledge and suggestionsProvided by my guide Mr. SYED GAZANFAR(A.EXECUTIVE) INVESTMENT DEPARTMENT who took sincere efforts and illustrated the Concept of Money market and its Instruments , with their vast knowledge in the field, which helped me in carrying out my internship.

Last but not least, I also thank all those people whom I met in the organistion during my internship and helped me to accomplish my assignments in the most efficient and effective manner.

EXECUTIVE SUMMARY

The basic aim of this project was to analyze the Money market

instruments interacting with the officials of investment department

directly.

The performance of J&K Bank is dependent on its investment

operations as around one third of the banks funds are deployed in

various investment avenues. Investment Department takes care of all

macro-economic affairs and is also responsible for maintaining

statutory requirements (CRR and SLR). The project will provide readers

a conceptual view about Money Market Instruments.

“Hope this research will help the readers to get acquainted with the

subject matter”.

ABOUT J&K BANK

THE JAMMU AND KASHMIR BANK IS ONE OF THE FASTEST GROWING BANKS IN INDIA

WITH A NETWORK OF MORE THAN 561 BRANCHES SPREAD ACROSS THE COUNTRY

OFFERING WORLD CLASS BANKING PRODUCTS/SERVICES TO ITS CUSTOMERS. TODAY

THE BANK HAS STATUS OF VALUE DRIVEN ORGANIZATION AND IS ALWAYS WORKING

TOWARDS BUILDING TRUST WITH SHAREHOLDERS, EMPLOYEES, CUSTOMERS,

BORROWERS, REGULATORS, AND OTHER DIVERSE STAKEHOLDERS FOR WHICH IT HAS

ADOPTED A STRATEGY DIRECTED TO DEVELOPING A SOUND FOUNDATION OF

RELATIONSHIP AND TRUST AIMED AT ACHIEVING EXCELLENCE, WHICH OF COURSE

COMES FROM THE WOMBS OF GOOD CORPORATE GOVERNANCE. GOOD GOVERNANCE

IS A SOURCE OF COMPETITIVE ADVANTAGE AND A CRITICAL INPUT FOR ACHIEVING

EXCELLENCE IN ALL PURSUITS. JK BANK CONSIDERS GOOD CORPORATE GOVERNANCE

AS THE SINE QUA NON OF A GOOD BANKING SYSTEM AND HAS ADOPTED A POLICY

BASED ON ALL THE FOUR PILLARS OF GOOD GOVERNANCE-TRANSPARENCY,

DISCLOSURE, ACCOUNTABILITY AND VALUE, ENABLING IT TO PRACTICE TRUSTEESHIP,

TRANSPARENCY, FAIRNESS AND CONTROL LEADING TO STAKEHOLDER DELIGHT,

ENHANCED SHARE VALUE AND ETHICAL CORPORATE CITIZENSHIP. IT ALSO ENSURES

THAT BANK IS MANAGED BY AN INDEPENDENT AND HIGHLY QUALIFIED BOARD

FOLLOWING BEST GLOBALLY ACCEPTED PRACTICES, TRANSPARENT DISCLOSURE AND

EMPOWERMENT. BESIDES ENSURING TO MEET SHAREHOLDERS ASPIRATIONS AND

SOCIETAL EXPECTATIONS FOLLOWING THE PRINCIPLES OF MANAGEMENT EXECUTIVE

FREEDOM TO DRIVE THE BANK FORWARD WITHOUT UNDUE RESTRAINTS BUT WITH

THE FRAMEWORK OF EFFECTIVE ACCOUNTABILITY. THE EXCELLENCE ACHIEVED BY

BANK IN ITS OPERATIONS STEMMING FROM THE ROOTS OF VOLUNTARY

GOVERNANCE HAS NOT GONE UNRECOGNIZED AND BANK HAS RECENTLY BAGGED

THREE VERY PRESTIGIOUS AWARDS FOR FAIR BUSINESS PRACTICES AND

COMMITMENT TO SOCIAL OBLIGATIONS.

CORPORATE GOVERNANCE

J&K Bank has been committed to al l the basic tenets of good Corporate Governance

well before the Securit ies and Exchange Board of India and the Stock Exchanges

pursuant to Clause 49 of the List ing Agreement mandated these. Now, it is our

Endeavour to go beyond the letter of the Corporate Governance codes and apply it

innovatively in a more meaningful manner thereby making it relevant to the

organization that is operating in a specif ic environment, which is different from the

generic Anglo-Saxon one. In l ine with the vision, J&K Bank wants to use Corporate

Governance innovatively in a transit ional economy l ike Jammu and Kashmir. The

Bank wants to use Corporate Governance as an instrument of economic and social

transformation. In due course, we would set our self targets of social and economic

reporting as a part of annual disclosures. This wil l help us conceptualize and

contextualize the form and content of Corporate Governance in a developing state.

Given the fact that J&K Bank is and is seen as a great success of” public-private

partnership”, our Bank as a business is expected to play a role in social

transformation of the economy. This lends urgency to implementation of good

governance practices which go beyond the Corporate Governance code. Operating in

an environment that is emerging from a situation of civi l str ife, the issue of

Corporate Governance assumes a different and greater relevance. We, as the prime

corporation of Jammu and Kashmir, have a vested interest in making the state a

safe place for business. J&K Bank has a key role to play in providing public and

private services, f inancial infrastructure and employment. As such, the eff iciency

and accountabil ity of the corporation is a matter of both private and public

interest, and governance, therefore, comes at the top of the agenda. The fact that

the bank is state owned but professionally managed, having a large size of

international investors, governance is cr it ical. For us Corporate Governance is

concerned with the systems of laws, regulations, and practices, which wil l promote

enterprise, ensure accountabil ity and trigger performance. The J&K Bank, for one,

stands for being more accountable, practice self-policing and make f inancial

transactions transparent and constitutional. The directors of J&K Bank have make it

an engine of social transformation. As an eminent corporate jurist (Chancellor

Wil l iam T. Al len) from US says, “A corporate director has civic responsibi l ity. The

people, who accept this responsibi l ity, do it conscientiously and well deserve our

respect as they are serving a nation. But those who as directors are passive and

view their role as mere advisers, are pl iable and pleasant but do not insist on a real

monitor’s role, do small service to anyone and deserve l itt le respect”. Our directors

belong to the former category.

Vision of J&K Bank

The Bank's vis ion is to be f inancial ly sound, profitable, growth and technology

oriented, committed to building and maximizing sustainable value for al l i ts

stakeholders. The Bank is committed to achieve healthy growth in profitabil ity and

simultaneously to remain consistent with the Bank's r isk appetite and at the same

time ensuring the highest levels of ethical standards, professional integrity and

regulatory compliance. “To catalyze economic transformation and capital ize on

growth”. The vision is to engender and catalyze economic transformation of Jammu

and Kashmir and capital ize from the growth induced f inancial prosperity thus

engineered. The bank aspires to make Jammu and Kashmir the most prosperous

state in the country, by helping create a new financial architecture for the J&K

economy, at the center of which wil l be the J&K Bank.

Mission Statement

J&K Bank’s mission is two-fold: To provide the people of J&K international quality

f inancial service and solutions and to be a super-special ist bank in the rest of the

country. The two together wil l make us the most profitable bank in the country.

BANK’ S PROFILEJammu & Kashmir Bank was founded on October 1, 1938 and commenced business

from July 4, 1939. The Jammu & Kashmir Bank Limited has been the f irst of its

nature and composit ion as a state owned bank in the country. The Bank was

established as a semi State Bank with participation in capital by state and the

public under the control of state government.The bank has to face serious problems

at the branches t ime of independence when out of its total of its total of ten

branches two branches of Muzaffarabad and Mirpur fel l to the other s ide of the

l ine of control (now Pakistan occupied Kashmir) along with cash and other assets.

Fol lowing the extension of central laws to the state of Jammu & Kashmir, the bank

was defined as a government company as per the provisions of Indian Companies

Act 1956.

Today, Jammu and Kashmir Bank is one of the fastest growing banks in India with a

network of more than 500 branches/off ices spread across the country offering world

class banking products/services to its customers. The Bank recently bagged three

very prestigious awards for fair business practices and commitment to social

obligations.

SPECIAL FEATURES OF THE BANK

1. Incorporated in 1938 as a Limited Liability Company.

2. Governed by Companies Act and Banking Regulation Act of India.

3. Regulated by Reserve Bank of India (RBI) and securities exchange Board of India (SEBI).

4. Listed on both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

5. 53% of the totals share are owned by Government of Jammu and Kashmir Government.

6. Rated ‘P1’ by Standard and Poor_ CRISIL connoting highest degree of safety.

7. Four decades of uninterrupted Profitability and dividends.

BOARD OF DIRECTORS

1. Mr. Mushtaq Ahmad Chairman

2. Mr. Sudhanshu Pandey Director

3. Mr. Arnab Roy Director

4. Mr.M.I Shahdad Director

5. Mr.Vikrant Kuthiala Director

6.Mr.A.M Matto Director

7.Mr.Prof.Nissar Ali Director

8. Mr. G.M. Dug Director

9. Mr. B.L. Dogra Director

10. Mr.A.K.Mehta Executive Director

11. Mr. Abdul Majid Mir Executive Director

Functions of the BoardJ&K Bank’s Board plays a pivotal role in ensuring good governance. Its style of

functioning is democratic. The members of the board have always had complete

freedom to express their opinion and decisions are taken on the basis of a

consensus arrived at after detai led discussion. The members are also free to bring

up any matter for discussion at the board meetings with the permission of the

Chairman. The day-to-day management of the Company is conducted by the

Chairman and C.E.O subject to the supervision and control of the Board of the

Directors. The functions performed by the the Board of the bank for eff ic ient and

effective uti l ization of resources at their disposal to achieve the goals, visualized,

interal ia, include setting Corporate Missions, Laying down Corporate Philosphy,

formulation of strategic and other Business Plans, Laying down of control measures

and compliance with Laws and Regulations.

Unique Characteristics: One of a kind

1. Private sector Bank despite government holding 53 per cent of equity.

2. Sole banker and lender of last resort to the Government of J & K.

3. Plan and non -plan funds, taxes and non-tax revenues routed through the bank.

4. Salaries of Government officials disbursed by the Bank.

5. Only private sector bank designated as agent of RBI for banking.

6. Carries out banking business of the Central Government.

7. Collects taxes pertaining to Central Board of Direct Taxes in J & K.

Brand Identity

The new identity for J&K Bank is a visual representation of the Bank’s philosophy

and business strategy. The three colored squares represent the regions of Jammu,

Kashmir and Ladakh. The counter-form created by the interaction of the squares is a

falcon with outstretched wings – a symbol of power and empowerment.

The synergy between the three regions propels the bank towards new horizons.

Green signif ies growth and renewal, blue conveys stabil ity and unity, and red

represents energy and power. Al l these attributes are integrated and assimilated in

the white counter-form.

ORGANIZATION STRUCTURE (investments)

Treasury Operations

1. Objectives

Main objectives of a bank Treasury is to maximum the returns with

optimum risk, this will improve the profitability of the bank and thereby

create value for its shareholders. Returns are associated with risks. High

risk-business gives high returns while low/zero risk yield only low/ nil

returns. It should be the Endeavour of treasury to maximize the profit with

in the given policy laminations. How ever profits are associated with

risks, therefore treasury has to see that as for as possible, the risk

associated with are totally hedged.

Control and minimizing the risk faced by the Bank is another objective

of the Treasury. It has to ensure that the Bank is not unnecessarily

exposed to risks, liquidity risks, market risks, funding risks, currency

risks, which should be effectively managed/hedged by the Treasury.

With diminished margins and increased completion for high quality

business on account of financial system reforms/ liberalization, there has

been intense pressure on a Bank to increase profitability. In a changed

circumstances. The focus has shifted towards maintaining maximizing the

‘spreads’ (Net interest margin) and control of risks, for which the treasury

should contribute by various techniques/operations like sourcing of low

cost funds by accessing diverse range of markets and entities with

liquidity. Treasury should play a vital role in increasing the ‘fee income’

of the bank through activities like trading in stock and securities etc.

Treasury function is also to be regarded as a service to the rest of the

business. It has to manage the residual funds to the bank, funds left

after deploying in the core activity to the bank, by developing it

appropriately, treasury, thus, is to be regarded as, “from line” in the

sense that it either makes profit in its own right or supports other areas

of the bank’s business to make profit (or minimize losses)

The treasury should also play a role, direct or indirect, in almost all the

heads, both on the Asset and liability sides, in the balance sheet. May

be it is for raising resources (Funding of assts) when there is need for

liquidity or for deployment in profitable avenues (Asset creation) when

there is surplus liquidity. Balance sheet management is yet another

important function of the Treasury.

At the macro level when the domestic market/economy is integrating

with the global economy, it is needless to emphasize the need for

integration of the macro level units. Most commercial banks had

already realized the fact and integrated their domestic treasury. It is in

this context; J&K Bank also integrated the functions of treasury and set

up an integrated Treasury under one roof with the following objective:

Proximity enables dealers remains informed of the development in

other markets.

Divergences in money and forex markets often give arbitrage

opportunities.Possibility of development / mobilization of resources at

better yield.

An intergraded treasury plays a vital part of any commercial bank’s

activities. It front-ends the bank in the inter bank and financial be they

money, gilt, bond, equity, foreign exchanges or derivatives.

Major Functions

In a backdrop of above objectives, the responsibilities of the treasury

cannot be recognized with any particular set of functions because its

encompasses, directly or indirectly, almost all activities of the Bank.

However the principal functional responsibility of the treasury is the

current asset / liability management (Which includes Reserves

management) and investments of the Bank. Our treasury has to

proactive and participative and not only react to internal thoughts and

ideas of the ma management. An efficient Treasury is thus always a

“profit center” for the bank.

In view of the above, major responsibilities/ functions of the treasury

includes

Domestic Treasury Function

Reserve Management

Cash Management

Liquidity Management

Investment Portfolio Management

Portfolio Management on behalf of clients

Control and risk Management

Guiding ALCO/ALM

Foreign Exchange Dealing

Function as a “A” category

Maintain Nostro accounts

Cover up operations for Merchants business

Inter-bank forex dealing

Trading in foreign currencies

Arrange foreign currency funds for leading to Corporates

Foreign investment

Coordinate with domestic segment for fund management.

Explore various arbitrage opportunities.

Derivative Business

Domestic Derivative Segment

Interest rate derivatives.

Futures & Options

Forex Derivatives

Forward exchange contracts

Currency futures & Options

Financial sectors

The various financial markets available to a treasury are as under:

Money market.

Debt market.

Capital markert and

Foreign exchange market.

Money Market

The term "Money Market" refers to the market for short-term

requirement and deployment of funds. Money market instruments are

those instruments, which have a maturity period of less than one year.

The most active part of the money market is the market for overnight

and term money between banks and institutions (called call money)

and the market for repo transactions. The former is in the form of loans

and the latter are sale and buy back agreements – both are obviously

not traded. The main traded instruments are commercial papers (CPs),

certificates of deposit (CDs) and treasury bills (T-Bills). All of these are

discounted instruments i.e. they are issued at a discount to their

maturity value and the difference between the issuing price and the

maturity/face value is the implicit interest. One of the important

features of money market instruments is their high liquidity and

tradability. A key reason for this is that these instruments are

transferred by endorsement and delivery. Another important feature is

that there is no tax deducted at source from the interest component.

Money Market Instruments :

Commercial Papers

Commercial Bills

Certificates of Deposit

Treasury Bills

Call money market

Debt market

Debt market refers to the financial market where investors buy and

sell debt securities, mostly in the form of bonds. These markets are

important source of funds, especially in a developing economy like

India. India debt market is one of the largest in Asia. Like all other

countries, debt market in India is also considered a useful substitute

to banking channels for finance

Capital market

Capital market deals in instruments which allows users of funds to

directly raise funds from the investors instead of sourcing the funds

from intermediaries like banks, financial institutions etc.

In vary simple terms, ‘Capital’ is described as owners stake or

investment in the business’. The investors (shareholders) are rewarded

by way of dividend (in case the profits are adequate).

Foreign Exchange market

Purchase or sale of one nation currency in exchange for another is

conducted in a market setting called foreign exchange market.Foreign

exchange makes possible international transaction such as import and

export and the movement of capital between countries. The value of

one foreign currency in the relation to another is defined by the

exchange rate.

As such, broader spectrum of Treasury Management

encompasses the following

Domestic Treasury Operation.

Foreign Exchange treasury operations Derivatives

CATEGORIZATION

The entire investment portfolio of the bank has to be classified

under three categories: as per RBI guidelines issued. These categories

are 1) held to maturity (HTM), 2) available for sale for sale (AHS) and 3)

held for trading (HFT).

A. Held for maturity: The investment under this category have

to be kept up to 24% of bank’s total investments. The Deptt, may

as allowed by RBI keep under these category securities less than

24% at its discretion but it should not exceed 40%. However, for

the purpose of ceiling the following investments can be kept

under this category but will not be counted for the purpose of

ceiling.

a) Re-capitalization bonds of Govt. of India

b) Invests in subsidiaries and joint ventures.

c)invests in bonds/debentures deemed to be in the nature of an

advance ( as defined in the above referred to RBI circular) profit

on sale of investments in this category shall be first taken to profit

and loss account and there after appropriated to capital reserves

account. Loss on sale in these investments shall be recognized in

profit & loss account.

B. Available for sale (AFS):- The bank is having the freedom to

decide the extent of holdings under AFS and held for trading

categories. This has to be decided by the central treasury after

considering various aspects such as basis of intent, trading

strategy, risk management capabilities, tax planning, manpower

skill and capital position etc. the securities acquired by the bank

with the intention to trade by taking advantage of short term.

Price interest rate movement will be classified under held for

trading. These securities are to be sold within 90 days. If the

department is not in a position to sell it within 90 days due to

exceptional.

Circumstances such as tight liquidity conditions or extreme

volatility or market becoming un-directional, the security may be

shifted to AFS category. The securities, which do not fall within

HTM and HFT categories, have to be classified under AFS

categories.

In the previous section a detailed analysis of various markets

has already been performed.

We turn now to specific analysis of particular security

market. We begin by analysis debt securities. A debt security is a

claim on a specified periodic stream of income. Debt securities are

often called fixed income securities because they promise either a

fixed stream of income or a stream of income that is determined

according to a specified formula. These securities have the

advantage of being relatively easy to understand because the

payment formulas are specified in advance. Risk considerations

are minimal as long as the issuer of the security is sufficiently

creditworthy. Therefore those securities are a convenient starting

point for our analysis of the universe of potential investment

vehicles.

CALL MONEY LENDING/BORROWING

Product Description

Call money is overnight (or till the next working day) borrowing or

lending. Call Money is a money market instrument wherein funds are

borrowed/lent for a tenor of one day/overnight (excluding

Sundays/holidays). It is not backed by collateral.

RBI LIMIT ON CALL MONEY LENDING/ BORROWING

On a fortnightly average basis, lending (including notice money

should not exceed 25% of their capital funds however banks are

allowed to lend a maximum of 50% of their capital funds on any

one day, during a fortnight.

On a fortnightly average basis, borrowing (including notice

money) should not exceed 100% of capital funds (i.e., sum of tier1

and Tier2 capital) of latest audited balance sheet. However banks

are allowed to borrow a maximum of 125% of their capital funds

on any day, during a fortnight.

COUNTER PARTY EXPOSURE LIMITS

While lending in call money /short term deposits the treasury has

to take care of counter party exposure limits. The individual bank

–wise limits have been last fixed and approved by the Board.

These limits are to be reviewed every year on the financial

strength of these counter parties. In this connection the

management has asked the treasury to develop a scientific

module that can analyze the qualitative as well as quantitave

parameters of the counter party for arriving at a genuine limit.

TRANSACTION PROCESS AND RESTRICTIONS

The borrower of funds will collect through/cheque and hand over

the deposit receipt to the lender on the value date of the deal. On

the due date, the lender will give back the deposit receipt to and

collect the cheque from the borrower. The interest rates are

determined by liquidity in the inter bank market and financial

system, the repo rate and reverse repo rate

Participants in call money market currently include banks, Primary

dealers development finance institutions select insurance

companies and select mutual funds of these banks and PD’s can

operate both as borrowers and lenders in the market. Non-bank

institutions, which have been given specific permission to operate

in call/notice money market, can however, operate as lenders

only.

Inter-bank borrowing is exempt from CRR. However, if the lender

is not a bank, CRR applies.

TRADING PLATFORM

Deals are mostly concluded on NDS_Call. For such deals the

procedure is simple and automatic. The deals concluded over

phones must be reported on NDS but settlement is outside NDS,

through RBIs high value clearing or RTGS. Deals should be

reported within 15 minutes in NDS, irrespective of size of the deal

9or whether the counter party is a member of the NDS or not in

case, there is repeated non reporting deals by an NDS member it

will be considered whether non reported deals by that member

should be treated as invalid with effect from a future date

TRADE ROUTING

The traders are routed directly between banks and counter party.

Broker intermediary is not allowed

INTEREST CALCULATION

Interest is calculated on actual /365 basis. The interest payable is

rounded off to the nearest rupee. Thus if Rs 10 Crores borrowed over

night at 8% p.a., interest is calculated as( 0.088x1/365 x 10 Crores)=Rs

21918( rounded to the nearest rupee)

NOTICE MONEY LENDING/ BORROWING

Notice money is borrowing or lending maturing in more than one day

but less than 15 days. Both borrower and lender have the option to

prepay/recall with 24 hours notice. The brrower/lender must convey

his intention to repay/recall the amount borrowed/ lent with at least24

hours notice.

RBI LIMIT ON NOTICE MONEY LENDING/ BORROWING

ON A FORTNIGHTLY AVERAGE BASIS , Lending ( including call

money) should not exceed 25% of their capital funds; however banks

are allowed to lend a maximum of 50% of their capital funds on any

day, during a fortnight

On a fortnightly average basis, borrowing (including call money) should

not exceed 100% of capital funds (i.e., sum of Tier 1 and Tier 2 of latest

audited balance sheet. However banks are allowed to borrow a

maximum of 125% of their capital funds on any day, during a fortnight.

TRANSACTION PROCESS AND RESTRICTIONS

The borrower of funds will collect the cheque and hand over the

deposit receipt to the lender on the value date of the deal on a due

date, the lender will give back the deposit receipt to and collect the

cheque from the borrower. The interest rates are determined by

liquidity in the inter bank market and financial system, call money rate,

the repo rate and reserve repo rate

Participants in money market currently include banks primary dealers

development finance institution, select insurance companies and select

mutual funds. Of these, banks and PD’s can operate both as borrowers

in the market. Non bank institutions, which have been given specific

permission to operate in call/notice money market, can however,

operate as lenders only. Inter bank borrowing is exempt from CRR.

However if the lender is not a bank CRR applies.

TRADING PLATFORM

Deals are mostly concluded NDS. However, the deals concluded on

phone must be reported on NDS, through RBI’s high value clearing or

RTGS. Deals should be reported on NDS within 15 minutes on NDS,

irrespective of the size of the deal or whether the counterparty is a

member of the NDS or not. In case, there is repeated non reporting

of deals by an NDS member, it will be considered whether non

reporting deals by that member should be treated as invalid with effect

from a future date.

TRADE ROUTING

The trades are routed directly between bank and counterparty. Broker

Intermediary is not allowed.

INTEREST CALCULATION

Interest is calculated on actual/365 basis. The interest payable is

rounded off to the nearest rupee .Thus , if Rs. 10 Crores is borrowed for

5 days @ 8.00% p.a. interest is calculated as ( 0.08 x 5/365 x 10 Crores)

= Rs 1,09,589.

TERM MONEY (STD )LENDING/BORROWING

PRODUCT DESCRIPTION

Term money also called “Short term Deposit Placement” in the Bank, is

the borrowing or lending for maturities beyond 15 days without

collateral. Bank is exempt from CRR for sub or one year borrowing if the

borrowing is inter-bank but must provide for SLR. Normally the rate of

interest on term money is fixed and interest payment is along with

principal on maturity. However, there is no restriction in payment of

coupon periodicity or the tenor. The interest rate can either be fixed or

floating. The maximum term money placements between the banks in

the past have been for a period as long as 5 years with half yearly

coupon payments.

Premature cancellation after 14 days can be done by mutual agreed

terms.

TRANSACTION PROCESS AND RESTRICTIONS

The borrower of funds will collect the payment either through RTGS or

cheque and handover the deposit receipt to the lender on the value

date of the deal. On the due date, the lender will give the deposit

receipt to and collect the payment from the borrower. In case the

maturity of term money falls on a holiday, the repayment will be made

on the next working day. Additional interest will be paid for such period

on the amount borrowed ( principal only) at the contracted rate.

The interest rates depend on the T-bill and CP yields for the tenor. The

interest rates should normally lie between the two but sometimes

exceed later because of the liquid bank institutions which have been

given specified requirements of specific banks or financial year ending

pressures.

Term money borrowing and lending could also be of the floating rate

time in which the period of deposit is fixed but the rate of interest is

reset every day. Interest may or may not be compounded daily.

Participants in term money currently include banks primary dealers,

development finance institutions, select insurance companies and

select mutual funds. Of these, banks and PD’s can operate both as

borrowers and lenders in the market. Non bank institutions which have

been given specific permission to operate in call or notice money

market can, however, operate in call/notice money market can,

however, operate as lenders only. No loan or overdraft can be granted

against term money. STD should not exceed limits, if any, or lending

placed through placed through the investment policy of the bank.

TRADING PLATFORM

Deals are mostly concluded on phone. Concluded deals must be

reported on NDS, through RBI’s high value clearing or RTGS. Deals

should be reported on NDS within 15 minutes on NDS, irrespective of

the size of the deal or whether the counterparty is a member of the

NDS or not. In case, there is repeated non reporting of deals by an NDS

member, it will be considered whether non reported deals by that

member should be treated as invalid with effect from a future date.

TRADE ROUTING

The trade is routed directly between bank and counterparty. Broker

intermediary is not allowed.

INTEREST CALCULATION

Interest is to be calculated on actual/365 days basis and is to be

rounded off to the nearest rupee. Periodicity for payment of interest

can also be quarerly/halfyearly/ on redemption, as agreed to at the line

of the deal. Interest can be either fixed or floating and may or may not

be compounded daily.

For instance, a 90 day borrowing of Rs. 10 Crores @ 7.00% (fixed) per

annum would cost Rs. (90/365 x 10 Crores) = Rs 17,26,027.

COLLATERALISED BORROWING & LENDING OBLIGATION

PRODUCT DESCRIPTION

Collateralized borrowing and lending obligation (CBLO) is a secured

form of borrowing and lending. The collateral is government of India

securities and treasury bills with residual maturity over six months.

Collateralized borrowing and lending obligation, a money market

instrument as approved by RBI, is a product developed by CCIL for the

benefit of the entities who have either been phased out from inter

bank call money market or have been given restricted participation in

terms of ceiling on call borrowing and lending transactions and who do

not have access to the call money market. CBLO is a discounted

instrument available in electronic book entry form for the maturity

period ranging from one day to ninety days (can be made available up

to one year as per guidelines).In order to enable the market

participants to borrow and lend funds, CCIL provides the dealing system

through Indian financial network (INFINET), a closed user group to the

members of the negotiated dealing system (NDS) who maintain current

account with RBI.

CCIL membership of CBLO segment is exempted to banks, financial

institutions, insurance companies, mutual funds, primary dealers,

NBFC’s non –government provident funds, Corporates etc. The

members are required to open constituent SGL (CSGL) account with

CCIL for depositing securities which are offered as collateral/margin for

borrowing and lending of funds.

TRANSACTION PROCESS AND RESTRICTIONS

Borrowing limit for the members is fixed everyday after marking to market and applying appropriate hair-cuts on the securities deposited in the CSGL account. The post hair- cut mark- to- market value after

adjusting for the amounts already borrowed by the members is the borrowing limit, which, in effect, denotes the drawing power up to which the members can borrow funds. Members are required to deposit initial margin generally in the form of cash/government securities and initial margin is computed at the rate of 0.50% on the total amount borrowed /lent by the members.

For lending, deals are allowed only with approved counterparties. The

borrowing/lending rates for CBLO are determined electronically using

CCIL’s trading platform and depend on the demand and supply of funds.

The “normal” market settles on T+0 or T+1 to specified timings. The

normal market can be accessed for borrowing funds to the extent of

their available borrowings limit, besides members can sell CBLOs held

by them to meet their funds requirement instead of waiting till

maturity. Members intended to sell CBLO’s (borrow funds) place their

offers directly on the market watch screen indicating the amount and

rate for a specific CBLO. Likewise, members to buy CBLO’s (lend funds)

place their bids specifying the amount and rate for a particular CBLO.

The matching of bids and offers takes place on Best yield- Time priority

basis.

There is also an “auction “market facility, through practically all trades

is done in the “normal “market.

TRADING PLATFORM

The trading platform is provided by CCIL

TRADE ROUTING

The trades are routed directly between bank and counterparty. Broker

intermediary is not allowed.

DAY COUNT CONVENTION

Discount is calculated on actual /365 basis. The interest payable is

rounded off to the nearest rupee. Thus, if Rs 10 Crores is borrowed

overnight @ 8.00 per annum. Discount is calculated as (0.08x1/365x 10

Corers) =Rs 21,918.

Certificate of deposit

Product Description

These are issued by banks in denominations of Rs0.5mn. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year. These are issued in denominations of Rs.5 Lacs and Rs. 1 Lac thereafter. Bank CDs have maturity up to one year. Minimum period for a bank CD is fifteen days. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. Usually, this means 366 day CDs. The market is most active for the one year maturity bracket,

while longer dated securities are not much in demand. One of the main reasons for an active market in CDs is that their issuance does not attract reserve requirements since they are obligations issued by a bank. They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits. And are also freely transferable by endorsement and delivery. At present CDs are issued in physical form (in the form of Usance promissory note). CD’s are not required to be rated. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act).

All scheduled banks (except RRBs and Co-operative banks) and financial institutions are eligible to issue CDs. They can be issued to individuals, corporations, trusts, insurance companies, funds and associations. Non-resident Indians can invest in CD’s on a non-repatriable, non transferable basis. They are issued at a discount rate freely determined by the issuer and the market/investors.

Banks / FI’s can’t grant loans against CD’s. Furthermore, they can’t buy

back their own CDs before maturity.Banks have to maintain the

appropriate reserve requirements, i.e., cash reserve ratio (CRR) and

statutory liquidity ratio (SLR) , on the issue price of the CDs.

Discount Rate

CDs may be issued at a discount on face value. Banks /FI’s are also allowed to issue CD’s on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market based. The issuing Bank / FI is free to determine the discount/ coupon rate. The interest rate on floating rate CDs would have to be reset

periodically in accordance with a predetermined formula that indicates the spread over a transparent benchmark. Thus, CDs can be issued on discount value basis or coupon bearing basis. The parties to contract are free to determine the discount rate.

Discount is calculated on actual / 365 day basis.

The discount to be calculated on rear-ended basis. The price is to be calculated up to a maximum of four decimal places and rounded off to the 4th decimal place.Scenario A:In case yield is given then:

Price =

100

PP=== ----------------------------------------------------------------------

(1 + yield* No. of days to maturity)

-------------------------------------------

365*100

Scenario B: In case price is given then:

Yield= (100- Price)* 365*

(price *No. of days to maturity)

TRANSACTION PROCESS AND RESTRICTIO

Investing in Primary issues

The investor has to apply for investment in CD in CD application format.

The back office is required to transfer funds to issuer’s account either

through RTGS or RBI cheque. The investor bank advices issuer of its

Depository Account details and the issuer send the CD to the

Depository for custody in banks name. Issuer also provides CD

Redemption Account details to the bank.

Investing Through Secondary Market

Currently, Banks are authorized to invest in CDs only in demat form.

The counter parties may decide upon the sequence of delivery of funds

and securities at the time of concluding the deal in the secondary

market.

Buying

In respect of investment through secondary market, the investor bank

has to invest the CD through usual channels similar to other

instruments such as debentures. The dealer has to prepare a deal slip

giving details of issuer, face value, discounted price and maturity. The

investor has to receive deal confirmation from the seller and also send

his own deal confirmation to the seller. He also has to advise the seller

the DP details. The seller must send delivery instruction to its DP for

transfer of CD to custody of bank’s DP.

The investor has to issue the RTGS funds transfer instruction or

cheque /pay order favoring the seller.

Selling

The transaction is done over normal dealing platforms. A Deal Slip

giving details of issuer, face value, discounted price and maturity and

Deal Confirmation is prepared and sent to buyer. Deal Confirmation

should specifically state that there is no recourse to bank if issuer

defaults on redemption. Simultaneously, the seller receives a Deal

Confirmation from the buyer. The buyer transfers funds through RTGS

to bank (or bank gets cheque /pay order). The buyer advises bank of its

DP details and bank sends Delivery instruction to its DP for transfer to

the Buyer’s DP.

Redemption of CDs in Bank’s Investment Portfolio

Bank asks DP to transfer its CD to the CD Redemption Account of the

issuer. (This should be done at least 2 working days in advance). Copy

of this instruction to Bank’s DP to be sent to issuer with details of

center and account to which bank requires the redemption payment to

be remitted. In case, the redemption date is a holiday, redemption is

done the previous working day.

Risks Involved

Price risk/Interest rate risk

Liquidity risk

Credit risk – Counter party risk is minimal since CD is a secure

instrument

Settlement Risk

Derivative Usance Promissory Notes

Product Description

Derivative Usance Promissory Notes (DUPN) or Bills Rediscounting

Scheme (BRD) are instruments accepted for payment by a bank on a

specific maturity date. Underlying a bill is a transaction representing

supply of goods drawn by the supplier on the buyer. The supplier

discounts the bill with his bank, the discount representing the

interesttill maturity. BRD is the rediscounting of trade bills, which

havealready been purchased by/ discounted with the bank by the

customers.The banks normally rediscount the bills that have already

been discounted with them or raise usance promissory notes in

convenient lots and maturities and rediscount them. The bill (or a

portfolio of such bills) is converted into a promissory note (called

Derivative Usance Promissory Note- DUPN) by the discounting bank.

The minimum and maximum tenors are 15 and 90 days respectively.

Discounted / rediscounted bills/ DUPN’s are transferable by

endorsement and delivery. In the process, they become marketable,

liquid instruments. Market is OTC.

Only the DUPN’s move to the rediscounting bank’s. The underline bills

remain in the custody of the (Primary) discounting bank.

DAY COUNT CONVENTION AND DISCOUNT RATE

The parties to contract are free to determine the discount rate.

Discount is calculated on actual/365 day basis. The amount payable to

the brrower is the principal amount less the discount/interest .While

discounting a bill /DUPN’s the amount of discount is to be deducted at

the time the bill/DUPN is issued .The discount is rounded of to the

nearest rupee. On maturity the brrower would repay the principal

amount.

EXAMPLE

Transaction Amount: RS 10,00, 00,000/-(Rupees ten crore) (principle amount)

No. of days : 45 days

Rate of Discount : 10.25 p.a.

Discount : Transaction Amount*No. of days*Rate of interest/discount 365*100

i.e; 10,00,00,000*45 *10.25

365*100

i.e; Rs 9,87,36,301/-

Amount to be repaid on maturity: Rs 10, 00, 00,000

TRANSACTION PROCESS AND RESTRICTIONS

The following types of bills can be accepted for rediscounting:

A bill drawn on and accepted by the purchaser’s bank and where

the latter is not a licensed commercial bank, it should in addition

bear the signature of a licensed bank.

A bill drawn on the buyer’s bank jointly and accepted by them

jointly.

A bill drawn on and accepted by the buyer under an irrevocable

letter of credit and certified by the buyer’s bank, which has

opened the letter of credit.

A bill drawn on and accepted by the buyer and endorsed by the

seller in favour of his bank and bearing a legend signed by a

licensed scheduled bank who should be an endorser of the bill.

The bill of exchange should be a genuine trade bill and should

have arisen out of sale of goods.

The bill should have a maturity period of not more than 90 days.

The bill should contain a clause indicating the nature of the

transaction out of which it has arisen.

Bills arising out of sale of prohibited commodities notified by RBI

are ineligible under this scheme. Accommodation bills are also

ineligible. Services sector bills are not eligible for rediscounting.

Bank can be both buyer and seller (rediscounter) of these instruments.

In either case it could be single bill or several bills or a portfolio of bills

in the form of single usance promissory note. The RBI states that there

should be a board-approved bill discounting policy in place. Bills should

represent genuine commercial and trade transactions of customers.

Banks should not deal in “without recourse” bills.

TREASURY BILLS:

These are issued by the Reserve Bank of India on behalf of the

Government of India and are thus actually a class of Government

Securities. At present, T-Bills are issued in maturity of 91 days, 182 days

and 364 days. . The minimum denomination can be as low as Rs100, but

in practice most of the bids are large bids from institutional investors

who are allotted T-Bills in dematerialized form. RBI holds auctions for

14 and 364 day T-Bills on a fortnightly basis and for 91 day T-Bills on a

weekly basis. For example a Treasury bill of Rs. 100.00 face value

issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

91 days T-Bills are auctioned under uniform price auction method where

as 364 days T-Bills are auctioned on the basis of multiple price auction

method. There is a notified value of bills available for the auction of 91

day T-Bills which is announced 2 days prior to the auction. There is no

specified amount for the auction of 14 and 364 day T-Bills. The result is

that at any given point of time, it is possible to buy T-Bills to tailor one’s

investment requirements.

Banks, Primary Dealers, State Governments, Provident Funds,

Financial Institutions, Insurance Companies, NBFCs, FIIs (as per

prescribed norms), NRIs & OCBs can invest in T-Bills.

Discount rate

T-Bill is a discounted instrument and is issued in the form of a

zero coupon instrument at discount to face value redeemable

at par on maturity.

Repayment

The amount on repayment is directly credited to the current

account of the investor held with RBI.

Issue Channels

There are two ways by which T-Bills can be purchased:

Primary Issues:

Through multiple price auctions. Bidders quote prices at discount to the

face value (Rs 100). Multiple bids are allowed. As in the case of G-

Secs, the RBI fixes a cutoff yield at and below which bids get full or

partial allotment.

Secondary Market:

In the secondary market, the trades are directly with counterparty or

through broker intermediary. The market consists of banks, PD’s-

entities which are obliged to bid in the primary auctions of the RBI and

are paid a commission for their services-insurance companies and

mutual funds.

Types of Trade and trading Platforms:

The types of trades are outright purchases/sales.

The trading platforms for G-Sec are NDS-OM (Negotiated Dealing

System-Order matching Segment) and OTC. In addition to NDS, G-Secs

can be traded on stock exchanges in dematerialized form. The trading

platform in stock exchanges is automated and order driven. Trades will

be settled similarly to equities through the concerned stock Exchanges

clearing House. For this purpose:

Day Count Convention is Actual /365

The market price quoted on yield to maturity basis. This can be

converted to price. The price is to be calculated upto maximum of four

decimal places and rounded off to the 4th decimal place

Scenario A: In case yield is given then:

Price= 100

-------------------------------------------------

(1+yield*No of days to maturity)

365*100

Scenario B: In case price is given then

Yield= (100-Price)*365*100

T-Bills are always valued at book value.

Risks on investment in T-Bills

Price risk. There is price risk due to interest rate

sensitivity

Liquidity risk ( in some maturity segments). It should be

ensured that investment in illiquid T-Bills may not be

made for that maturity profile.

Counterparty risk. This is minimal due to DVP mode of

settlement.

Operational risk. This is minimal and it is ensured that

trades are confirmed on the trade date itself and the

settlement is done before the time prescribed by RBI.

Reputation risk. The instances of SGL bouncing has

reduced due to introduction of Liquidity Adjustment

Facility (LAF) by RBI. RBI has also mentioned the

introduction of Real Time Gross Settlement (RTGS) to

avoid such instances

INTER-BANK PARTICIPATION CERTIFICATE(IBPS)

PRODUCT DESCRIPTION

As the name suggests, IBPC’s are instruments which allow banks to

acquire a share of another bank’s loan portfolio and enable banks with

surplus funds to deploy them.The arrangement could be with or

without risk-sharing .Not more than 40% of an advance can be

earmarked for participations.

In IBPC’s of the risk sharing variety, the acquiring bank has no recourse

to the IBPC –issuing bank if the advance underlying the participations is

in arrears or defaulters.

If it is without risk sharing, there is no credit risk exposure to the

underlying advance but only to the IBPC-issuing bank.Thus, the bank

can finance a portion of its loan portfolio by issuing IBPC’s to other

banks. It can also acquire IBPC’s issued by other banks, representing a

part of their loan portfolio. In the first case, the bank reduces the

advances in its book while in the second it has an asset. Banks can issue

IBPC’s only against their standard assets. Also the loan agreement

between the issuing bank and the borrower must explicitly provide for

transfer of the borrower’s liability to another bank.

IBPCs are not transferable instruments.IBPCs are subject to the uniform

code governing inter-bank participation.

IBPC SCHEMES

RISK SHARING

Minimum maturity 91 days, maximum 180 days.

Rate of interest is mutually negotiated between the issuer and

buyer.

Issuing bank should not finance more than 40% of an advance

with IBPC’s at the time of issue.

In case the advance falls below IBPC’s issued, the issuing bank

must reduce participation to the extent necessary.

In case the advance is crystallized, the IBPC-issuing bank must

advise the participating banks of the fact. Recoveries from the

brrower and his assets will be shared proportionately among the

issuing bank and the participating banks.

The issuing bank is not subject to reserve requirements on these

borrowings.

CONDITIONS

The issuing banks should make available all necessary information on the borrower to participating banks, including its appraisal, security details, sanction note to its board etc.

All rights and powers of the participating banks will vest with the

issuing bank.

The issuing bank has discretion on expanding or waiving the

conditions attached to the loan provided it does not dilute the

obligations or the brrower and/or guarantor under the loan

agreement.

The issuer will fronted participants in all maters relating to

administering the advance in terms of the loan agreements with

the borrower .it will have full discretion to (or not to ) exercise its

rights under the loan agreements. However, changes to the loan

agreement which have the effect of varying a borrower’s

obligations require the consent of participants.

The loan agreement must specifically provide for participations.

NON-RISK-SHARING

Tenor not to exceed 90 days.

The rate of interest is mutually negotiated between the issuer and

participating banks.

COMMERCIAL BILLS

PRODUCT DESCRIPTION

Bills of exchange are negotiable instruments drawn by the seller

(drawer) of the goods on the buyer (drawee) of the goods for the value

of the goods delivered. These bills are called trade bills. These trade

bills are called commercial bills when they are accepted by commercial

banks. If the bill is payable at a future date and the seller needs money

during the currency of the bill then he may approach his bank for

discounting the bill. The maturity proceeds or face value of discounted

bill, from the drawee, will be received by the bank. If the bank needs

fund during the currency of the bill then it can rediscount the bill

already discounted by it in the commercial bill rediscount market at the

market

related discount rate.

The RBI introduced the Bills Market scheme (BMS) in 1952 and the

scheme was later modified into New Bills Market scheme (NBMS) in

1970. Under the scheme, commercial banks can rediscount the bills,

which were originally discounted by them, with approved institutions

(viz., Commercial Banks, Development Financial Institutions, Mutual

Funds, Primary Dealer

DISCOUNT RATE

CP’s may be issued at a discount on face value. The parties to contract

are free to determine the discount rate. Discount is calculated on

Actual/365 day basis.

Discount to be calculated on a rear –ended basis. The price is to be

calculated up to a maximum of four decimal places and rounded off to

the 4th decimal place.

Scenario A: In case yield is given then:

Price =

100

PP=== -------------------------------------------------------------

(1 + yield* No. of days to maturity)

-------------------------------------------

365*100

Scenario B: In case price is given then:

Yield= (100- Price)* 365*100

(price *No. of days to maturity)

TANSRACTION PROCESS AND RESTRICTIONS

Investing in primary issues

In a primary issue, the investing bank applies to the issuer along with

payment in terms of the Letter of offer by CP Issuer. Yield offered in

relation to credit rating and secondary market for similar issues should

be checked.The investing bank advises issuer/IPA of its DP details and

IPA issues CP to the DP for its custody on behalf of the investing

bank .IPA issues a Certificate to investing bank conforming compliance

of issuer with the RBI’s and other conditions for issue of CP and also

gives rating and backstop (if any) particulars. Issuer swaps Deal

Confirmation Note with the investing bank

NDS has module to report CP issuance. All CP issues must be reported

on the NDS in two days from completion of the issue, in addition to the

existing RBI.

Investing through secondary marketCurrently, banks are authorized to

invest in CP’s only in demat form .The counterparties may decide upon

the sequence of delivery of funds and securities at time of concluding

the deal in the secondary market.

Buying

In respect of investement through secondary market,the invester bank has to invest the CP through usual channels similar to other instruments such as CD.

The dealer has to prepare a deal slip giving details of issuer, face value,

discounted price and maturity. The investor has to receive deal

confirmation from the seller and also send his own deal confirmation to

the seller. He also has to advise the seller the DP details. The seller

must send delivery instruction to its DP for transfer of CP to custody of

banks DP.The investor has to issue RTGS funds transfer instruction or

cheque/pay-order favoring the seller.

Selling

The transaction is done over normal dealing platforms. A deal slip giving

details of issuer, face value, discounted price and maturity and deal

confirmation is prepared and sent to buyer. Deal confirmation should

specifically state that there is no recourse to bank if issuer defaults on

redemption. Simultaneously, the seller receives a deal confirmation

from the buyer .The buyer transfers funds through RTGS to bank (or

bank get cheque / pay order).The buyer advises bank of its DP details

and bank sends delivery instruction to its DP for transfer to the buyer’s

DP.