Basics of Capital Market and Money Market:3

Money Market Funding Engine.
Money Market Funding Engine. (Photo credit: Wikipedia)

2.  Direct Investment in shares, convertible bonds and debentures etc. by banks:  

Banks are free to  acquire shares, convertible debentures of Corporates and units of  equity oriented mutual funds subject to a ceiling of 5% of the total outstanding domestic credit (excluding inter bank lendings and advances outside India) as on March 31 of the previous year.  Within the overall ceiling of 5% for total exposure to capital market, the total investment in shares, convertible debentures and units of equity oriented mutual funds by a bank should not exceed 20% of its net worth.

3.  Ready forward Contracts in Government Securities or Repos:  

It is a transaction in which two parties agree to sell and repurchase the same security.  Under such an agreement, the seller sells specified securities with an agreement to repurchase the same at a mutually agreed future date and rate.  Similarly the buyer purchases the security with an agreement to resell the same to the seller on an agreed future date at an agreed price.  Such a transaction is called Repo when viewed from sellers angle and Reverse Repo from the angle of the buyer of the securities. RBI regulates the ready forward transactions in securities.   Ready forward contracts can be undertaken only in Treasury bills and dated securities issued by the Govt. of India and state governments with approved counter parties, having SGL account with RBI Mumbai. Double ready forward deals  in Government securities including treasury bills is strictly prohibited.

4.    -Transactions through SGL Account:

a.    All transactions in Govt. securities for which SGL facility is available should be put through SGL accounts only
b.    Under no circumstances, an SGL transfer form issued by a bank in favour of another bank should bounce for want of sufficient balance of securities in the SGL account of seller or for want of sufficient balance in the current account of the buyer.
c.    The SGL transfer form received by purchasing banks should be deposited in their SGL account immediately i.e. the date of lodgement of SGL form with RBI shall be within one working day after the date of signing of the Transfer Form.  While in OTC trades, the settlement has to be only on spot delivery basis. In case of deals through recognized stock exchanges, settlement should be within  the delivery period as per their rules, bye laws and regulations.
d.    No sale should be effected by way of return of SGL form held  by the bank.

5. Use of Bank Receipt: 

  
No bank receipt be issued under any circumstances in respect of transactions in Govt. securities for which SGL facility is available.

6. Engagement of Brokers: 

a.    A disproportionate share of the business should not be transacted through only one or a few brokers. Banks should fix limit for each of the approved brokers.  A limit of 5% of the total transactions (both purchase and sales) entered into by a bank during a year should be treated as the aggregate upper contract limit of each of the approved brokers.
b.    Inter-bank securities transactions should be undertaken directly between banks and no bank should engage the services of any broker in such transactions except through members of NSE, OTCEI and the BSE.

7. Classification:  

The entire investment portfolio of the banks (including  SLR securities and Non-SLR securities) should be classified under three categories viz. Held to Maturity(HTM), Available for  sale (AFS) and Held for Trading (HFT). Banks should decide the category of investment at the time of acquisition.

1.    The securities acquired by the banks with the intention to hold them upto maturity will be classified under  HELD TO MATURITY.  The investments included under this head should not exceed 25% of the bank’s total investment.
2.    The securities acquired by banks with the intention to trade by taking advantage of the short term price/interest rate movements will be classified under Held for trading.  These securities are to be sold within 90 days
3.    The securities which do not fall under the above two categories are to be classified under AVAILABLE FOR SALE. 
4.    Banks may shift investments from/to HTM category with the approval of the Board of Directors once a year, normally at the beginning of the year.  Banks may shift investments from AFS  to HFT category with the approval of the Board/ALCO/Investment committee.  Shifting of securities form HFT to AFS category is allowed only in exceptional circumstances. Transfer of securities from  one category to another,  under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation if any on the date of transfer has to be fully provided for.

8. Valuation:  Investments classified under HTM category need not be marked to market and  will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity.  The individual securities in the AFS  category will be marked to market at quarterly intervals.  Net depreciation under prescribed balance sheet categories  should be recognized while net appreciation to be ignored.  HFT securities will be revalued at monthly or at more frequent intervals and the net depreciation will be recognized

9. Capital Adequacy :  Investment in Govt. securities by banks carry a risk weight of 2.5% for capital adequacy purposes. Banks have been stipulated  in 2001 to build an Investment Fluctuation Reserve to the tune of  5%of the total portfolio less the HTM category over 5 years.

Overseas Debt Market for Indian Corporates:   Availability of External Commercial Borrowings by way of convertible bonds/ Floating rate bonds/Suppliers credit/Buyers credit on very liberal terms also affect the Indian Debt Market.  Even Banks are now permitted to invest in overseas market in a more liberal way.

MONEY MARKET:

Money market deals with short-term money and financial assets that are near substitutes for money.  By short term it is meant generally a period less than 12 months. Near substitute to money means any financial asset which can be converted into cash quickly with minimum transaction cost.

The Indian Money market has the following sub markets:

1.    Call/Notice  Money Market:  Call money  market is that part of the money market where the day to day surplus funds, mostly of banks are traded. Call money  is an amount borrowed or lent on demand for a very short period ranging between a day and 14 days.  Call money is repayable on demand while Notice money is repayable in a day to 14 days notice.   This is  a completely inter bank market. Commercial banks, co-operative banks and primary dealers are allowed to operate in this market.  Specified all India Financial Institutions, Mutual funds and certain specified entities like  DFHI, STCI, LIC, UTI, GIC    are allowed to the market only as lenders. Interest rates depend on the supply and demand position and there are virtually no regulations.  Settlements take place through RBI account.

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