Money Market : It is a market for short term loans or financial assets.

. It is a market for the lending and borrowing of short term funds. It does not deal in cash or money. It actually deals with near substitutes for money or near money like trade bills , promissory notes and govt. papers drawn for a short period not exceeding one year. Features of a Money Market : 1. It is a market for short term funds or financial assets called near money. 2. It deals with financial assets having a maturity period upto one year only. 3. It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. 4. The transactions take place over the phone and there is no formal place. 5. The transactions have to be completed without the help of brokers. 6. It consists of several sub markets such as call money market, bill market etc. 7. The Central Bank and Commercial banks are the major institutions in the money market. 8. Each single money market instrument is of large amount. A Treasury bill is of minimum for one Lakh. Each CD or CP is for a minimum of 25 lakhs. Importance of Money Market : A money market plays an important role in the financial system of a country by supplying short-term funds adequately and quickly to trade and industry. It is essential for the rapid development of the nation. It helps in smooth functioning of the financial system in any economy in the following ways : 1. Development of trade and industry It is an important source of financing trade and industry. It finances short term working capital requirements for them. So it helps in the development of trade. 2. Development of capital market The short term rates of interest and the conditions that prevail in the money market influence the long term interest as well as the resource mobilization in the capital market. Hence it helps in the development of capital market. 3. Smooth functioning of commercial banks The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realizable assets. It helps commercial banks to meet their statutory requirements of CRR and SLR by using the money market mechanism. 4. Effective Central Bank control

It helps in effective implementation of the monetary policy of a central bank. Thus the central bank regulates the flow of money so as to promote economic growth with stability. 5. Formulation of monetary policy It serves as a guide to the govt. in formulating and revising the monetary policy then and there depending upon the monetary conditions prevailing in the economy. 6. Non- inflationary source of finance to govt. A developed money market helps the govt. to raise short term funds thro treasury bills floated in the market. In the absence of money market the govt. is forced to print and issue more money or borrow from the central bank. Composition of Money Market It consists of a number of sub- markets which collectively constitute the money market.The main sub-markets are: 1. Call money market It refers to the market for extremely short period loans , say one day to fourteen days.These loans are repayable on demand at the option of either the lender or borrower.These loans are given to brokers and dealers in stock exchange. Similarly banks with surplus funds lend to other banks with deficit funds in the call money market.The commercial banks can quickly borrow from the market to meet their statutory liquidity requirements. 2. Commercial Bills market A commercial bill is one which arises out of a genuine trade transaction i.e. credit transaction. If the goods are sold on credit , the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay the amount after a certain specified date. It is always drawn for a short period ranging from 3 to 6 months It is a market for Bills of exchange . In case of credit sale , the seller draws a bill on the buyer. The buyer accepts it and agrees to pay at a later date.The seller need not wait until the due date of the bill. He can get immediate payment by discounting the bill in commercial bill market. In India the bill market is under developed. The Discount and Finance House of India was set up in 1988 to promote secondary market in bills. The commercial banks play an important role in this market. 3. Treasury Bills market It is a market for T- Bills which have short term maturity. A T- Bill is a promissory note or a finance bill issued by the govt. Such bills are issued by the by the govt. under discount for a specified period stated therein. The govt. promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. T- bills are issued only by the RBI on behalf of the govt.

Such bills are issued for meeting temporary govt. deficits. The rate of discount is fixed by the RBI . There are two types of such bills ordinary t- bills and ad hoc t- bills. Ordinary t- bills are issued to the general public and other financial institutions for meeting short term needs of the central govt. Ad hoc bills are always issued in favour of the RBI only. They are purchased by the RBI and the RBI is authorized to issue currency notes against them. T- bills may be 91 days bills, 182 days bills and 364 days bills. The participants in this market areRBI, SBI, Commercial banks, State govt. DFHI, STCI , LIC GIC, UTI, IDBI, IFCI, NABARD, corporate customers and public. 4. Acceptance market It refers to the market where short term genuine trade bills are accepted by the financial intermediaries.All trade bills are not discounted easily because the parties to the bills may not be sound. In such case, bills are accepted by the financial intermediaries like banks.By acceptance the banks add its good name to the bill and it can be easily discounted anywhere. Deficiencies of the Indian money market 1. Existence of unorganized sector The Indian money market consists of organized and unorganized sector.The organized sector includes RBI, SBI, LIC , GIC etc. The unorganized sector consists of indigenous bankers. A high rate of interest is prevailing in the unorganized sector. 2. Absence of integration The organized and unorganized sector did not have any contact between them. 3. Diversity in money rates of interest There exists wide diversity in the money rates of interest in the money market. The immobility of funds from one section to another contributes to the diversity of funds. 4. Seasonal stringency of funds The demand for funds in Indian money market is of seasonal in nature. Money is needed in the busy agricultural seasons and not in the off season. 5. Absence of bill market The bill market in India is in its infant stage.The market for govt. and semi-govt. securities is narrower. 6. No contact with Foreign money markets 7. Limited instruments

The supply of money market instruments like bills, T- bills etc. is very limited . In developed money market ,there should be well diversified mix of money market instruments. 8. Limited secondary market The secondary market is very limited in the case of money market instruments.So the people prefer the cash credit and OD than bill financing. 9. Limited participants The participants in the Indian money market are also limited.Entry into the market is strictly regulated. Hence the marker is not very active. ****************************** Principles of sound lending : 1. Safety A bank lends what it receives from the public as deposits. Safety depends upon the security offered by the borrower and the repaying capacity and willingness of the debtor to repay the loan with interest. So the security offered is adequate and readily realizable and the borrower is a person of integrity and good faith. 2. Liquidity It refers to the ability of an asset to convert into cash without loss within short time.The liabilities of a bank are repayable on demand or at a short notice. To meet the demand of the depositors in time , the banks should keep its funds in liquid state. 3. Profitability The banks also run for profit. They earn profit to pay interest to depositors,to pay dividend to shareholders and to meet the establishment expenses.So a banker has to employ his funds in such a way that they will give good return. 4. Security Customers offer different types of securities viz., land building machinery etc. The banker should that the securities are adequate, marketable and free from encumbrances. 5. Purpose of the loan Before sanction of the loan a banker should enquire about the purpose of the loan for which it is needed. Loans for undesirable activities such as speculation and hoarding should be discouraged.So the loans should be given for productive purposes. 6. Sources of repayment

Before giving loan , a banker should see the source of repayment . An examination of the audited a/cs of the borrower may guide the banker to know the repaying capacity of the borrower. 7. Diversi fication of the risks The banker should not lend a major portion to one particular person or to one industry or to one region. An adverse change in the economy may affect the entire business. 8. Recent concept of sound lending Banks are catering to the needs of development of nation. If rapid progress is to be realized, bank credit should be made available to the neglected sectors and to the under privileged sections of the society. They should also see the productivity of loan to ensure its timely repayment. SECURED AND UNSECURED ADVANCES Loans and advances may be made based on the personal security of the borrower or on the security of some tangible assets. The former is called unsecured advances and the later is called secured advances. The unsecured loan or advances means a loan or advance not so secured. Such loans are granted on the basis of integrity and sound financial position of the customer. The confidence in the borrower is the basis of unsecured loans. Hence the banker should know the customer well and he must judge them by looking into three Cs viz., character, capacity and capital. Character It involves the personal qualities like honesty, responsibility, promptness and goodwill. A man of integrity can repay the loan in time. So a banker can extent loan to him without any reservation. Capacity The capacity of a borrower refers to his ability to manage the business. Hence the capacity of a borrower is judged by his technical competence , experience in that line of business , operational efficiency of the project, its earning power and also the productive purpose of the loan. Capital A borrower should have sufficient capital to conduct his business and adequate plant and machinery to carry out normal production. Hence the banker may follow the formula given below:

Character + Capacity + Capital = Safe credit Character + Capacity + Insufficient capital = Fair credit risk Character+ Capacity Capital = Limited success Capital + Capacity Impaired character = Doubtful credit risk Capital + Capacity Character = Dangerous risk Character + Capital - Insufficient capacity = Fair credit risk Character + Capital Capacity = Inferior credit risk Character - Capital Capacity = Fraudulent one *********************************************

BANKING SECTOR REFORMS The banking sector in India is undergoing fast changes in order to keep pace with the International banking practice. One such important change in the banking sector is the introduction of prudential norms for Income recognition, Asset classification, Provision requirements and capital adequacy based on the recommendations of the Narasimhan Committee. They are as follows : Income recognition As per the revised norms, income from Non- performing Assets (NPAs) is not recognized on accrual basis. It should be treated as income only when it is actually received or recovered. To be more specific , if the interest debited is not recovered within 180 days from the past due date , then the same shall not be recognized as income. The RBI permits 30 days grace period to decide PAST DUE status. Now the concept of past due is withdrawn and it has been proposed that 90 days norm for recognition of loan impairment will be effective with effect from 31. 3. 2004. Non Performing Assets (NPA) NPAs are loans made by a bank or finance company on which repayments or interest payments are not being made on time. They are also called as non- performing loans. Banks usually treat assets as non-performing if they are not serviced for some time. If the payments are late for a short time, a loan is classified as past due. Once a payment is really late (usually 90 days) the loan is classified as non- performing.A high level of non-performing assets may be a sign of problems.

NPA means an asset or account of borrower which has been classified as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by the RBI. With effect from 31.3. 2004 , an NPA shall be a loan or advance where : 1. Interest and / or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan. 2. The a/c remains out of order for a period of more than 90 days in respect of an OD/CC. 3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. 4. Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half- years in the case of an advance granted for agricultural purpose. 5. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Classification of Assets Standard Asset These are loans which have less risk. Such assets are not NPAs. These are regular and performing and there are no adverse features. Substandard Asset It is one which is classified as NPA for a period not exceeding 2 years. Doubtful Asset It is one which remains NPA for a period exceeding 2 years. Loss Asset It is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. Loss assets are those NPAs where 100% loss has been identified.

Capital Adequacy Norms To strengthen the soundness and stability of our banking system, the committee recommended that all bankers should achieve a capital adequacy of 8% which has been accepted globally over a period of time. The RBI has issued directions to all banks to achieve the above target. The capital adequacy has been increased by 1% point to 9% with effect from Mar. 2000. Features of Capital Adequacy Norms For the purpose of CA norms , the capital of banks has been classified under two categories , I.e.Tier-I and Tier II . The Tier-I capital consists of the following; a) Paid-up capital b) Statutory and other free reserves including share premium

c) General reserves less investments in subsidiaries, intangible assets and brought forward and current losses. The Tier-II capital includes the following : a) b) c) d) e) Undisclosed reserves and cumulative perpetual pref. shares Revaluation reserves at a discount of 25% Surplus provisions /loss reserves subject to a maximum of 1.25 % weighted risk assets Hybrid debt capital instrument Subordinated debt Capital Adequacy= Weighted risk assets ---------------------------- *100 Capital funds Banks are required to maintain a minimum CRAR- capital to risk- weighted- assets ratio of 9% .The capital requirements are uniformly applied to all banks including foreign banks operating in India, by way of prudential norms on capital adequacy. Banks have also been advised to formulate and operationalise the Capital Adequacy Assessment Process(CAAP) as required under Pillar II of the New Framework. As per Basel II norms , a consultative and participative approach has been adopted for designing and implementing the New Framework. A steering committee including senior officials from 14 banks with representation from IBA and RBI has been constituted. On the basis of the recommendations of the committee, draft guidelines on implementation of the New Capital Adequacy Framework have been issued to banks. Prudential Accounting Norms for Banks The RBI persevered with the ongoing process of strengthening prudential accounting norms with the object of improving the financial soundness of banks and to bring them at par with international standards, advised PSBs to set up the Settlement Advisory Committee (SAC) for timely settlement of NPAs. The Union Budget also announced the setting up of 7 more Debt Recovery Tribunal(DRT) for speedy recovery of bad loans. The Securitisation and Reconstruction of Financial and Enforcement of Security Interest(SARFAESI) Act ,2002 was passed to regulate securitization and reconstruction of financial assets and enforcement of security interest for realization of dues without the intervention of courts or tribunals. Asset Liability Management (ALM) RBI advised banks to put place an ALM system and set up internal Asset Liability Management Committee (ALCO) at the top level to oversee its implementation. As per guidelines , banks were required to prepare statements on liquidity gaps and interest rate sensitivity at regular intervals.

Board for Financial Supervision( BFS) An independent Board for Financial Supervision under the control of RBI has been started as the apex supervisory body for commercial banks , FIs , urban banks and NBFCs.The supervisiory rating system under CAMELS (Capital Adequacy, Asset quality, Management, Earnings Liquidity, Systems and Control) has been established , with a move towards risk- based supervision. Non- Performing Loan Management(NPLM) Banks have been provided with the plan of options for recovery of NPAs. Banks recover their NPAs thro compromise/onetime settlement, filing of suits, DRTs, Lok Adalat (peoples court) , sale to securitization companies and other banks or to NBFCs.The CIBIL credit information bureau of India ltd. was set up to improve the quality of credit analysis by banks and FIs. Provisioning for Loans and Advances The provisioning requirements for various classes of assets are given below : Name of the Asset 1. Standard Assets 2. Sub-standard Assets 3. Doubtful Assets a)NPA of 2 to 3 years b)NPA of 3 to 5 years c)NPA of more than 5 years 4. Loss Assets provision Requirement No provision is required A general provision of 10%of the outstanding 100%to the extent of deficit(advance-security)+ 20%of tangible security available 30%of tangible security available 50%of tangible security available 100% of the outstanding

Effects of Banking sector Reforms 1. 2. 3. 4. 5. 6. 7. 8. 9. Some banks have strengthened their capital base thro public issue of shares. Private sector banks have been established. More branches of foreign banks are established in India. Prudential norms for income recognition ,asset classification, provisioning and capital adequacy norms have been strictly enforced to achieve international standards. To relieve the banks from the high level of reserve requirements- CRR &SLR has been reduced. The TDS on govt. securities has been removed. The determination of foreign exchange rate is left to market conditions. A Board for Financial Supervision has been set up for supervising of banks and FIs. The CIBIL has been set up for collecting, processing and sharing credit information on the borrowers.

10. Recovery of debts due to banks and the Financial Institutions Act 1993 was passed and special recovery tribunals were set up to facilitate quick recovery of loan arrears. These are the developments have taken place in Indian banking due to the introduction of banking sector reforms. ************************************