What is Call Money (Term Money) & How Does it Work?
Quick access to funds is paramount. One such solution that empowers individuals and businesses to meet their immediate financial needs is call money. Lenders demand full repayment of a short-term notice money loan. However, like any double-edged sword, notice money presents both advantages and potential pitfalls. So, let’s dive in to understand whether the notice money market is a blessing or an unwanted curse.
To start with, let us define money at call market.
What is the Call Money Market?
People also refer to the call money market as money at call or notice money. It is a short-term loan that comes with an interest. The lender demands full repayment of this type of loan. Thus, the notice money loan has a tenure ranging from one to fourteen days after the lender or a leading financial institution disburses the amount.Unlike a tenure loan, notice money neither follows a fixed schedule nor does the lender provide prior call notice term money for repayment.
Financial institutions refer to the interest rate charged on a call money loan as the notice moneyt loan rate. Since notice doesn’t follow the regular payments process, the call loan rate varies from lender to lender.
What is the Call Money Rate?
The call money market involves borrowing and lending short-term funds at the notice money rate. It signifies the cost of borrowing or the yield on lending funds temporarily. Factors such as the interplay between fund supply and demand, current market conditions, and monetary policy decisions influence the notice money rate. Market participants closely monitor it as a reference point for additional short-term interest rates. Now that we know the notice money market meaning, let us check out a few of the features of call money market.
What are the Call Money Market Characteristics?
Here are some of the characteristics of notice money market:
- Short-Term: These short term investment plans are typically for a very short period of time, usually one day or overnight.
- Unsecured: Notice money loans are unsecured, meaning that the lender does not have any collateral to secure the loan. This makes notice money loans a riskier investment for lenders, but it also means that they can offer a higher interest rate.
- Liquid: The notice money market is very liquid, meaning that funds can be borrowed and lent quickly and easily. This makes it a good option for banks and other financial institutions that need to meet their short-term liquidity needs.
- Volatile: The interest rates on notice money loans can be volatile, meaning that they can change quickly. This is because the notice money market is sensitive to changes in demand and supply.
What are the Functions of the Call Money Market?
The call money market has a number of important functions, including:
- Facilitating Short-Term Borrowing and Lending: The primary purpose of the Notice Money Market is to facilitate short-term borrowing and lending among financial institutions.
- Enhancing Liquidity Provision: The notice money market facilitates the borrowing and lending of funds on a short-term basis, enabling banks and financial institutions to maintain adequate liquidity.
- Assisting with Reserve Requirement Management: The central bank requires banks to maintain a specific level of reserves. The notice money market helps banks manage their reserve requirements by offering them the option to borrow funds overnight.
- Facilitating Interbank Transactions: This market plays a crucial role in facilitating interbank trading. Banks can utilize the market to engage in buying and selling of funds among themselves, fostering smooth transactions and the overall functioning of the banking system.
- Providing a Reference Interest Rate: The interest rates associated with notice money loans often serve as a benchmark for other short-term interest rates. As a result, the interest rates in this market can impact the borrowing costs of various other types of short-term loans.
Who are the Participants of the Call Money Market?
The participants in the call money market are typically banks, primary dealers, and other financial institutions. These institutions use the notice money market to borrow and lend funds on a short-term basis.
Let’s have a look at the table.
| Borrowers | Lenders |
|---|---|
| 1. Scheduled Commercial Banks 2. Co-operative Banks 3. Primary Deals(PDs) | 1. Scheduled Commercial Banks 2. Co-operative Banks 3. Primary Dealers(PDs) 4. All India Financial Institutions 5. Select Insurance Companies 6. Select Mutual Funds |
Call Money vs. Short-Notice Money
Money at call and short-notice money share similarities as they both involve short-term loans between financial institutions. Call money requires immediate repayment when demanded by the lender, while short notice money allows for repayment within 14 days after receiving notice from the lender. Like notice money, the short-notice money market is regarded as a highly liquid asset, ranking below cash but above other items on the balance sheet. Call Money vs Notice Money is not a debate investors need to engage in, but rather educate themselves about both of these liquid assets.
Are Call Money and Money at Call the Same?
The terms “call money” and “money at call” are synonymous. In both terms, the borrower must repay the full amount upon the lender’s request, and they represent short-term loans.
What is Call Rate?
The call rate, a key financial indicator, represents the interest rate paid on call loans, and it’s known for its high volatility. The degree of this volatility hinges on the intricate interplay between supply and demand within the call loan market. It is also closely linked to various short-term money market instruments.
One noteworthy aspect of the call rate is its inverse relationship with other elements of the market. When the call rate experiences an upswing, banks often turn to alternative funding sources such as Certificate of Deposits. Conversely, during periods of low notice money rates, banks frequently seek to finance commercial papers by borrowing from the notice money market, thereby exploiting profit opportunities through arbitrage between different money market segments.
Furthermore, the call rate can be significantly influenced by the issuance of government securities. When banks subscribe to substantial government securities issuances, the call rates tend to rise, and conversely, a decrease in such subscriptions typically results in a decline in call rates.
Features of Call Money
The Call Money Market, often referred to as the ‘Notice Money’ Market, is characterized by its high liquidity. This market, while offering quick access to funds, is known for its inherent risk and volatility.
Here are a few key features of the notice money market:
- No security or collateral requirements for transactions.
- Operates as an ‘Over-the-counter’ market, eliminating broker intermediaries.
- Participants include scheduled commercial banks, non-scheduled commercial banks, foreign banks, state, district, and urban cooperative banks, along with brokers, dealers in the securities market, and primary dealers.
What are the Advantages & Disadvantages of Notice Money?
Advantages
Here are some of the advantages of call money market:
- Flexibility: Notice money loans are very flexible, meaning that they can be called back at any time by the lender. This gives the borrower a lot of flexibility in terms of their cash flow.
- Liquidity: The notice money market is very liquid, meaning that funds can be borrowed and lent quickly and easily. This is important for banks and other financial institutions that need to meet their short-term liquidity needs.
- Low-Interest Rates: The interest rates on notice money loans are typically low, which can save the borrower money.
Disadvantages
Here are some of the disadvantages of notice money:
- Risk: Notice money loans are unsecured, meaning that the lender does not have any collateral to secure the loan. This makes notice money loans a riskier investment for lenders.
- Volatility: The interest rates on notice money loans can be volatile, meaning that they can change quickly. This can make it difficult for borrowers to plan their cash flow.
- Cost: There may be fees associated with borrowing call money, which can add to the cost of the loan.
Call Money Example
Let’s consider an example to understand how call money works:
Suppose Bank A is experiencing a temporary liquidity shortfall and needs immediate funds to meet its reserve requirements. Bank B, having excess funds, is willing to lend to Bank A through the notice money market.
Bank A contacts Bank B and requests a notice money loan. They agree on the terms, such as the loan amount, interest rate, and duration. In this case, let’s say Bank A borrows ₹1 crore at an interest rate of 4% for a duration of one day.
Bank A receives the funds from Bank B and utilizes them to meet its immediate liquidity needs. As per the agreement, Bank A is required to repay the loan in full whenever Bank B demands it, usually within the agreed-upon duration.
Now, let’s say Bank B requires the funds back after two days instead of one. It contacts Bank A and asks for the repayment of the notice money loan. Bank A is obliged to repay the ₹1 crore principal amount, along with the agreed-upon interest of 4%, to Bank B.
To Wrap It Up…
To conclude, call money is any kind of short-term loan that accrues interest and must be repaid promptly when requested by the lender. Thus, by grasping its nuances and leveraging its benefits while mitigating risks, you can harness the power of notice money to enhance your financial strategies and achieve your goals in the dynamic world of finance.
FAQs
The meaning of call money or notice money market is the borrowing or lending of funds on a short-term basis, typically for one day. In this context, “call” signifies the ability to request or recall the funds on short notice.
Call Money is the borrowing or lending of funds for one day. Whereas, the period ranging from 2 days to 14 days, is referred to as ‘Notice Money’. And ‘Term Money’ refers to borrowing/lending of funds for a period exceeding 14 days
Money at call is given by lenders. These lenders may include scheduled commercial banks, RBI, primary dealers(PDs), All India Financial Institutions, selected Insurance companies or selected mutual funds.
Notice money can be used to meet daily cash-to-cash needs.
Scheduled Commercial Banks (excluding RRBs), Co-operative Banks (except Land Development Banks), and Primary Dealers (PDs) can participate as both lenders and borrowers in the notice money market.
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