farhat project

8/2/2019 Farhat Project

1/49

MONEY MARKET & ITS INSTRUMENTS

BABA GHULAM SHAH BADSHAH

UNIVERSITY

MONEY MARKET & ITS PRODUCTS

SUMMER TRAINING PROJECT

J&K BANK

Under the supervision of: Submitted By:

Mr. SYED GAZANFAR FARHAT RASHID

Mr. GAURAV SEHGAL 49-MBA-08

SCHOOL OF MANAGEMENT STUDIES

B G S B UNIVERSITY, Rajouri

(2009)


2/49


ACKNOWLEDGEMENT

I am extremely thankful to my project guide Mr. Syed Gazanfar (Senior

Treasury Officer) for providing me the required guidance and valuable

suggestions during my project work.

I am also thankful to all of the staff members and class mates of

University, for steering me through the difficult times I encountered

throughout the development of this project.

Last but not the least I would also like to express my

sincere gratitude to everyone who has contributed to the

successful completion of this project.

THANK ONE AND ALL.

CERTIFICATE OF ORGINALITY


3/49


This is to certify that Ms Farhat Rashid d/o Ab Rashid Mir

student of BGSB University Rajouri J&K has completed her

summer training project on the topic MONEY MARKET

INSTRUMENTS.

During her summer training she proved to be an

effective and sincere student and we wish her all the best

in her future endeavor.

Mr. SYED GAZANFAR

(A.EXECUTIVE) INVESTMENT DEPARTMENT


4/49


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.


5/49


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 PRACTICETRUSTEESHIP, 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


6/49


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 all the basic tenets of good Corporate

Governance well before the Securities and Exchange Board of India and the Stock

Exchanges pursuant to Clause 49 of the Listing 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 specific environment, which is

different from the generic Anglo-Saxon one. In line with the vision, J&K Bank

wants to use Corporate Governance innovatively in a transitional economy like

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 will 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 civil strife, 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 p lace for business. J&K Bank has

a key role to play in providing public and private services, financialinfrastructure and employment. As such, the efficiency and accountability 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 critical. For us Corporate Governance is concerned with the


7/49


systems of laws, regulations, and practices, which will promote enterprise, ensure

accountability and trigger performance. The J&K Bank, for one, stands for being

more accountable, practice self-policing and make financial transactions

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

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

William T. Allen) from US says, A corporate director has civic responsibility.

The people, who accept this responsibility, 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 pliable and pleasant but do not insist on

a real monitors role, do small service to anyone and deserve little respect. Our

directors belong to the former category.


8/49


Vision of J&K Bank

The Bank's vision is to be financially sound, profitable, growth and technology

oriented, committed to building and maximizing sustainable value for all its

stakeholders. The Bank is committed to achieve healthy growth in profitability

and simultaneously to remain consistent with the Bank's risk appetite and at the

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

and regulatory compliance. To catalyze economic transformation and capitalize

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

Jammu and Kashmir and capitalize from the growth induced financial 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 will be the J&K Bank.

Mission Statement

J&K Banks mission is two -fold: To provide the people of J&K international

quality financial service and solutions and to be a super-specialist bank in the

rest of the country. The two together will make us the most profitable bank in the

country.


9/49


BANK S PROFILE

Jammu & Kashmir Bank was founded on October 1, 1938 and commenced

business from July 4, 1939. The Jammu & Kashmir Bank Limited has been the

first of its nature and composition 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 time of independence when

out of its total of its total of ten branches two branches of Muzaffarabad and

Mirpur fell to the other side of the line of control (now Pakistan occupied

Kashmir) along with cash and other assets. Following 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/offices 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.


10/49


7. Four decades of uninterrupted Profitability and dividends.

BOARD OF DIRECTORS

1. Dr Haseeb Draboo Chairman

2. Mr. M.S Verma Director

3. Mr. G.P Gupta Director

4. Mr. B.B Vyas (I.A.S) Director

5. Mr.A.K.Mehta Executive Director

6. Mr. Abdul Majid Mir Executive Director

7. Mr. G.M. Dug Director

8. Mr. B.L. Dogra Director


11/49


Functions of the Board

J&K Banks 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 detailed 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 efficient and effective

utilization of resources at their disposal to achieve the goals, visualized, interalia,

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.


12/49


Brand Identity

The new identity for J&K Bank is a visual representation of the Banks

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 signifies growth and renewal, blue conveys stability and unity, and red

represents energy and power. All these attributes are integrated and assimilated

in the white counter-form.


13/49


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/ nilreturns. 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 treasuryshould 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.


14/49


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 he banks 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 followingobjective:

Proximity enables dealers remains informed of the development in

other markets.


15/49


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

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

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

1.Major FunctionsIn 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

A) Domestic Treasury Functiona. Reserve Managementb.Cash Management


16/49


c. Liquidity Managementd.Investment Portfolio Managemente. Portfolio Management on behalf of clientsf. Control and risk Managementg.Guiding ALCO/ALM

B) Foreign Exchange Dealing Branchi) Function as a A categoryii) Maintain Nostro accountsiii) Cover up operations for Merchants businessiv) Inter-bank forex dealingv) Trading in foreign currenciesvi) Arrange foreign currency funds for leading to

Corporates

vii) Foreign investmentviii) Coordinate with domestic segment for fund

management.

ix) Explore various arbitrage opportunities.C) Derivative Business

Domestic Derivative Segment1. Interest rate derivatives.2. Futures & Options

Forex Derivatives1. Forward exchange contracts


17/49


2. Currency futures & Options

2. Financial sectors

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

a) Money market.b) Debt market.c) Capital marker andd) Foreign exchange market.

Money Market

Money market is a market for short-term money and financial

assets that are near substitutes for money. Short term means generally

period up to one year and near substitute to money is used to denote

any financial assets which can be easily & quickly converted into

money without much loss and with minimum transaction cost thus,

money market straddles only a short term debt instruments which are

transferable by endorsement and negotiation like certificates of

deposit, commercial paper, participation certificates, commercial bills

eligible for re-discount, treasury bills etc.

Debt market

Debt market facilitates efficient financial intermediation as they

use market mechanism for allocating and pricing of credit. The debt


18/49


market deals in term debt paper of Government of India (dated

securities), corporate debt (NCDs, bonds .An intergraded treasury plays

a vital part of any commercial banks activities. It front-ends the bank in

the inter bank and financial be they money, gilt, bond, equity, foreign

exchanges or derivatives.

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 thefollowing

Domestic Treasury Operation. Foreign Exchange treasury operations Derivatives


19/49


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 banks 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


20/49


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 arespecified in advance. Risk considerations are minimal as long as the

issuer of the security is sufficiently creditworthy. Therefore those


21/49


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 shouldnot 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.


22/49


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 bankwise 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 ascientific 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 andselect mutual funds of these banks and PDs can operate both as

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


23/49


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


24/49


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

are allowed to lend a maximum of 50% of their capital funds on anyday, 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.


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


25/49


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 PDs 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 RBIs 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


26/49


The trades are routed directly between bank and counterparty. Broker

Intermediary is not allowed.


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.


27/49


Premature cancellation after 14 days can be done by mutual

agreed terms.


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 PDs can operate both as


28/49


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 RBIs 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 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


29/49


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 & LENDINGOBLIGATION

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 sixmonths.

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


30/49


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, NBFCs non government provident funds, Corporates etc. Themembers 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.


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 depositinitial 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.


31/49


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

borrowing/lending rates for CBLO are determined electronically using

CCILs 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 CBLOs (borrow funds) place their offers

directly on the market watch screen indicating the amount and rate for a

specific CBLO. Likewise, members to buy CBLOs (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


32/49


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

Certificate of deposit (CD) is a negotiable money marketinstrument and issued in dematerialized form or as a usance promissory

note, for funds deposited at a bank or other eligible financial institutes

for a specified time period. Certificates of deposit (CDs) can be issued

by (i) scheduled commercial banks excluding regional rural banks

(RRBs) and local area banks(LABs) ; and (ii) select all India financial

institutions that have been permitted by RBI to raise short term

resources within the umbrella limit fixed by RBI. Banks have the

freedom to issue the CDs depending on their requirements.

Minimum amount of a CD should be Rs 1 lakh, i.e. the minimum

deposit that could be accepted from a single subscriber should not be

less than Rs 1 lakh and in the multiples of Rs 1 lakh thereafter.

The maturity period of CDs issued by banks should not be less

than 7 days and not more than 1 year. The FIs can issue CDs for a


33/49


period not less than 1 year and not exceeding 3 years from the date of

issue.

Banks / FIs cant grant loans against CDs. Furthermore, they

cant 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 /FIs are

also allowed to issue CDs 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.


34/49


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*100

(price *No. of days to maturity)


Investing in Primary issues


35/49


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

format. The back office is required to transfer funds to issuers 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 banks DP.


36/49


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 Buyers DP.

Redemption of CDs in Banks 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 Banks 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 isdone the previous working day.

Derivative Usance Promissory NotesProduct Description


37/49


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 interest

till maturity. BRD is the rediscounting of trade bills, which have already

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/ DUPNs are transferable by endorsement and

delivery. In the process, they become marketable, liquid instruments.

Market is OTC.

Only the DUPNs move to the rediscounting banks. 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


38/49


discounting a bill /DUPNs 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) (principleamount)

No. of days : 45 days

Rate of Discount : 10.25 p.a.

Discount : Transaction Amount*No. of days*Rate of

interest/discount365*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


The following types of bills can be accepted for rediscounting:


39/49


A bill drawn on and accepted by the purchasers bank and where thelatter is not a licensed commercial bank, it should in addition bear the

signature of a licensed bank.

A bill drawn on the buyers 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 buyers bank, which has opened the letter of

credit.

A bill drawn on and accepted by the buyer and endorsed by the seller infavour 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 havearisen 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 areineligible 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


40/49


should represent genuine commercial and trade transactions of

customers. Banks should not deal in without recourse bills.

TREASURY BILLS:

T-Bills are short term instruments issued by the RBI for Govt for

financing the temporary funding requirements and are issued for

maturities of 91 days, 182 days and 364 days. T-Bills have a face value

of Rs 100 but have no coupon (no interest payment). T-Bills are instead

issued at a discount to the face value (say @Rs 95) and redeemed at par

(Rs 100). The difference of Rs 5(100-95) represents the return to the

investor obtained at the end of the maturity period.

T-bills are discount (zero coupon) debt instruments with a maximum

maturity of 364 days. They must not be confused with ad hoc Treasury

Bills, which were in the nature of overdrafts from the RBI to

Government.The settlement of deals, reported on the NDS, is settled by CCIL. CCIL

guarantees the settlement of the deals through novation.

Issue Channels


41/49


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, PDs-

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


42/49


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: Incase yieldis 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.

INTER-BANK PARTICIPATION CERTIFICATE(IBPS)

PRODUCT DESCRIPTION

As the name suggests, IBPCs are instruments which allow banks

to acquire a share of another banks 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 IBPCs 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.


43/49


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 IBPCs to other banks. It can also acquire IBPCs 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 IBPCs only against their standard assets. Also

the loan agreement between the issuing bank and the borrower must

explicitly provide for transfer of the borrowers liability to anotherbank.

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

IBPCs at the time of issue.

In case the advance falls below IBPCs issued, the issuing bank mustreduce participation to the extent necessary.

In case the advance is crystallized, the IBPC-issuing bank must advisethe participating banks of the fact. Recoveries from the brrower and his


44/49


assets will be shared proportionately among the issuing bank and the

participating banks.

The issuing bank is not subject to reserve requirements on theseborrowings.

CONDITIONS

The issuing banks should make available all necessary information onthe 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 theissuing bank.

The issuing bank has discretion on expanding or waiving the conditionsattached 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 toadministering 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 borrowers obligations require the

consent of participants.

The loan agreement must specifically provide for participations.NON-RISK-SHARING


45/49


Tenor not to exceed 90 days. The rate of interest is mutually negotiated between the issuer andparticipating banks.

COMMERCIAL PAPER

PRODUCT DESCRIPTION

Commercial Paper (CP) is an unsecured money market

instrument issued in the form of a promissory note and is a discount

(zero coupon) instrument CP can be issued for maturities between a

minimum of 7 days and a maximum upto one year from the date of

issue. The maturity date of the CP should not go beyond the date upto

which the credit rating of the issuer is valid.

With a minimum maturity of 7 days and maximum maturity of one year,

it is issued by Corporates. CP can be acquired from the primary or

secondary market. It is to be held and traded only in demat form as far

as banks and institutional investors are concerned.

DISCOUNT RATE

CPs 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.


46/49


47/49


Certificate to investing bank conforming compliance of issuer with the RBIs

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 market

Currently, banks are authorized to invest in CPs 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 tothe 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.


48/49


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 buyers DP.

Redemption of CDs in banks investment portfolio

Investing bank asks its DP to transfer the CP to the CP redemption

account of the IPA (details of which are available in the IPAs

certificate).The transfer should be done by 3p.m.one working day

before maturity so that the IPA can pay the investor on the maturity

redemption is subject to the availability of sufficient funds of the issuer

with IPA. In case the redemption date is holiday, redemption is done theprevious working day.


49/49


farhat project

Documents