The money used to accomplish short-term needs is known as call money for a short time, the time given for paying back call money is only 1 day and after 1 day, money becomes notice money if the borrower doesn’t pay. We can say that call money is also helping money that is used to manage some tasks by financial institutions and commercial banks.
From where call money is called?
Call money is called from money markets where debt financing solutions are offered for a short time with a high rate of interest which is called ‘call rate’ or where there perform sale and purchase activities (debt products such as commercial paper and treasury bills).
Who are lenders and borrowers in the call money market?
The basic lenders in the money market are the banks or the financial institutions who offer money to other banks or other commercial banks to never lose security and money. The major parties involved in the call market are banks, financial institutions, Insurance companies, Brokerage companies or firms, and Primary Dealers that are specified by the RBI but excluding RRB’s.
What is the call rate?
Call rate is known as an interest that is charged on call amount that is not fixed but fixed based on running interbank rate. The rate is charged till the repayment process.
The term is used for short term funds or loans that the lenders (the banks or other financial institutions) provide to the borrowers (the banks or other financial institutions) for a limited time (for 1 or 2 days) so that borrowers decrease their fund’s shortage to run in the financial market or improve their liquidity to balance goodwill.
Purpose of call money
The purpose of call money is different for lenders and borrowers such as:
Why call money is offered by lenders ?
Call money is offered by lenders as we know, but their purpose to offer money to the borrowers is to lend money for a short term to meet the financial shortage.
- To analyze the liquidity percentage in the economy
- To measure the financial stress in the economy
- To familiar with banks economic and financial status
- To make a relationship between the call market and the banks for permanent dealings.
- To describe a gap between closing cash position and opening a cash position
- To improve the bank’s economic condition through call amount
- To lend money to the borrowers on interbank call rate
- For longer existence
- Opportunity to get a service fee along with call rate
Why call money is issued by borrowers?
The borrowers are the same as the lenders in the call market. The purpose of issuing money is to buy a security for filling securities value.
- To meet short term funds requirements
- To meet reserve requirements
- To maintain margin accounts
- To oversee and balance liquidity needs
- Issued call money as a call loan that is repaid immediately as per the demand of the lender without receiving any repayment notice.
- To buy securities on margin rates
11 Advantages of call money
Here are some advantages:
1. Short-term nature
Short-term funds are available for a short time that is used by the banks for increasing their securities value and maintaining their margin accounts. The money is beneficial due to short-term criteria so that if lenders call for repayment then they can recover that money immediately.
2. No penalty
There is no penalty charge at the time of issuing money due to a short-time loan. It is issued to fulfill short-term requirements so that they can handle the financial situation.
3. No repayment schedule
Like other loans, there is no fixed time to the legal promise of repayment capital. It is given as per the call demand of the lender which is arranged immediately by recovering short-term loans.
It is different from other loans due to fewer legal formalities and strict laws and rules due to contracts between banks.
4. Purchase securities
With the amount of money, borrowers can meet their short time needs and make a source of income by purchasing securities. It is mainly used to maintain margin accounts by taking ownership of securities so that they can settle their accounts. The Call amount is a short-term amount that needs to be recovered immediately before receiving the call from lenders.
5. Direct interact with other banks for call money
There is an advantage of call money, if single banks need short-term funds to maintain their short-term budget and balance their liquidity so they directly interact with other banks or other financial institutions for money, offered on interest (call rate) that is charged up to 14 days maximum. It means the surplus bank helps the deficit bank in its declining situation.
6. Set maturity period
There is a set maturity period that is 14 days maximum. It is a transaction from bank to bank, no other borrower can be involved in this for taking a commission as a mediator. 2 to 14 days is the maximum maturity period in the call money market for short-term finance.
7. Smooth process
It is a smooth process that does not contains lengthy loan procedures, short-term loans, no fixed repayment schedule. It is happening secretly, no third party is involved.
8. No fixed principal amount & interest
There is no fixed principal amount & interest in the call market, it is fixed as per requirement, and interest is charged on running bank rate. Lenders earn a high rate of interest on call amount that is charged on hour to hour or day to day.
9. Easily manage margin accounts
By issuing call money, borrowers can handle their margin accounts to flow transactions by purchasing securities. At the last, they recorded as liquid assets in the balance sheet. When receiving a call from lenders to repay the amount, the margin call needs to be off to recover money.
10. Opportunity to earn interest
For lenders, there is a big opportunity to earn interest on the call amount for a short time. Interest rate is also known as call rate in the call money market, it is charged based on the bank rate. It is a part of the money market which is used in the form of financial securities.
11. Profitable
It is a profitable process for lenders (the bank) to earn high interest on money in less time. On the other hand, it helps other banks to improve efficiency and credit score.
3 Disadvantages of call money
Here are some disadvantages:
1. Risky
Issuing call money is risky more than other loans due to the immediate demand of repayment amount. It is risky because when lenders make an immediate call for repayment then the borrower must recover that amount to lenders. That lender’s call may come at any time.
2. Sale of securities
When lenders ask for repayment call amount then borrowers need to sell securities if they can’t arrange that amount quickly. The sale of securities is the only option to recover the repayment of money.
3. No repayment notice
Repayment notice is like a deadline notice to repay the loan that alerts borrowers but in this money, there is no repayment notice. Without repayment notice, borrowers need to sell securities to recover the amount.
Read more…