Money Market and Banking - Securities, Lending, NPAs, SARFAESI Act, Credit Rating, NBFC, Basel, CRAR, CAR and much more.

February 25, 2018

Functions of Money:



Contingent Functions of Money:

  1. Distribution of National Income among factors of production.

  2. Comparison of Marginal Utility of different items of Consumption.

 Coinage Act, 1906:

  1. Government of India has a sole right to issue coins.

  2. Coins are minted in India at four places - Mumbai, Kolkata, Hyderabad and Noida.

RBI Act,1934:

  1. RBI under it can issue the note of Rs.2 to 10,000 -these notes are called as Bank notes.

  2. Note of Rs. 1 is called currency note of Government of India because it is issued by Government of India.

System of Currency Issue in India:

  1. RBI is responsible to issue currency notes of Rs. 2 and above on behalf of Government of India. RBI while issuing currency maintain a reserve with it under a definite system. 

  2. Evolution of the System:

    • Proportional Reserve System (1935-56)

      • At least 40% Gold and Pound. The value of gold or gold part is not less then 40 crore of 40%.

      • Rest part in form of Rupee coins and Rupee securities of Government of India.

    • Minimum Reserve System (1956-till date)

      • At least 515 crore gold and foreign exchange/currency.

        • Out of this Gold is about 115 crore.

        • It also includes Foreign Currencies.

        • Rest is Rupee coins, Rupee securities of Government of India.

      • It was amended in 1957, by which

        • 515 crore was reduced to 200 crore. 

        • RBI need to just maintain the foreign currencies.

      • Value of Gold is measured on the basis of international gold price at market level i.e. through London gold market where 10 ounce - 28.3495 grams.

 Financial Securities:

  1. Financial securities are the financial instruments issued by institutions, organisation, companies or government to borrow money or to raise capital. They can be short term securities or long term securities.

  2. If there maturity time is up to including 1 year they are called short term securities.

  3. If more than 1 year then it is long term security.

  4. Securities are tradable i.e. once issued they can be brought or sold in financial markets.



Securities under Money Market:

  1. Bill of Exchange.

  2. Treasury Bill

  3. Cash Management Bill

  4. Commercial papers

  5. Certificate of Deposits (issued by Scheduled Commercial Banks)

Securities under Capital Market:


  2. Debentures

  3. Units of Mutual Funds

  4. Certificate of Deposits ( issued by All India Financial Institutions) 


In this section we will only look towards the securities under Money Market.


Bill of Exchange/Commercial Bills:

  1. Issued for payment purpose in International trade by which the drawn of the bill makes unconditional undertaking to pay to the drawee a definite amount of money at a future given date usually 3 months ahead. 

  2. It is quite similar to post dated cheque.

  3. They can be accepted by a bank or by a trader and thus called bank bills or trader bills respectively.


Treasury Bills:

  1. Issued by Government to borrow money for a short time period.

  2. State governments are not allowed to issue treasury bills.

  3. Treasury Bills are issued by Government fo India for - 91 days ; 182 days and 364 days.

  4. Since May, 2010 , smaller duration treasury bills known as Cash Management Bills are also issued for a duration of 28days or 35 days.

  5. Minimum face value of treasury bills is 250 crores and are managed by RBI on behalf of Government of India through auction method. Floor value is decided by RBI and the bid is higher than floor value but less than face value of Treasury Bill.

  6. Face value - Bid = Yield. It should not be confused with Interest.

  7. They are attractive ans safe for buyers as they have sovereign guarantee.

  8. Participants in the auction are:

    1. Commercial Banks.

    2. State Governments

    3. Corporate Entitites

    4. Financial Institutions

    5. Foreign Central banks

    6. Foreign Institutional Investor

    7. Discount and Finance House of India etc.




Ad hoc treasury bills were meant for providing short term funds to the government by the RBI at a fixed rate of interest but in practice it became permanent and cumulative. As a monetary reform, Ad-Hoc treasury bill system was terminated from 1st April 1997 and replaced by new system called ways and means advances (WMAs). 



Ways and Means Advances:

  1. It is applicable for both Central and State governements.

  2. WMAs for Central Government:

    • For each Financial year, an agreement is made between RBI and Ministry of Finance to decide the limit of WMA for four different quarters.

    • Any amount taken by the government is supposed to be returned in 90 days from the date of borrowing.

    • WMA is charged by the RBI at a rate equivalent to Repo rate.

    • Any amount borrowed above the WMA limit is called overdraft which has to be returned within 10 consecutive days and attract the interest rate equivalent to Repo rate plus 2%.

    • If the amount is not returned on time, then RBI is authorised to close the account of Government.

  3. WMAs for State Government:

    • As per the MP Bezbaruah Committee recommendation which was accepted by the government and RBI, The WMA limit for state is decided by its average expenditure (excluding repayment of loans) of preceding 3 Financial year.

    • For special category states the WMA limit is 4.1 percent of this average and for non special category state it is 3.1% of this average.

    • Overdraft facility is allowed for 14 consecutive days for which rate is Repo rate plus 1%.

    • Special WMA:

      • It is in addition to WMAs, where state government the limit is linked to the quantum of investment in the government of India securities including Auction Treasury Bills. 










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