Call Money

Call Money — Meaning, Definition & Full Explanation

Call Money refers to very short-term interbank loans that are repayable by the borrower on demand by the lender, typically within one business day. It is a vital instrument in the money market, allowing banks to manage their immediate liquidity needs and fulfil reserve requirements. These unsecured loans do not require any collateral and are crucial for maintaining stability in the banking system.

What is Call Money?

Call Money is a critical component of the money market, representing funds borrowed or lent on an overnight basis by banks to meet their immediate cash requirements. These are unsecured loans, meaning no collateral is pledged against them. The unique characteristic of Call Money is its 'on-call' nature, where the lender can demand repayment at any time, and the borrower must comply instantly, usually within the same business day. Banks primarily use the Call Money market to manage temporary mismatches between their inflows and outflows of funds, ensuring they have sufficient liquidity to meet obligations like Cash Reserve Ratio (CRR) requirements or unexpected withdrawals. The interest rate at which these funds are lent and borrowed is known as the 'Call Rate', which acts as a key indicator of liquidity conditions in the banking system.

How Call Money Works

The Call Money market functions as a platform where commercial banks and other authorised financial institutions lend and borrow funds from each other for extremely short durations. The process typically involves:

1. Identifying Liquidity Needs: A bank (borrower) faces a temporary deficit of funds, perhaps due to large withdrawals or a need to meet its daily reserve requirements with the central bank. Simultaneously, another bank (lender) has a temporary surplus of funds.
2. Market Interaction: The borrowing bank approaches the Call Money market, often through electronic platforms or direct negotiation, to secure funds. The lending bank offers its surplus funds.
3. Agreement on Call Rate: Both parties agree on an interest rate, known as the Call Rate, for the overnight loan. This rate is highly sensitive to the prevailing liquidity conditions in the market.
4. Fund Transfer: Once agreed, the lending bank transfers the funds to the borrowing bank.
5. Repayment on Demand: The borrowing bank repays the principal amount along with the agreed interest on the very next business day, or even sooner if the lender demands it (though in practice, it's typically overnight). The essence of Call Money is that the funds are "at call," meaning the lender does not need to give prior notice for repayment.

Call Money in Indian Banking

In India, the Call Money market is a highly regulated segment of the interbank money market, primarily overseen by the Reserve Bank of India (RBI). As per RBI guidelines, Call Money refers strictly to overnight borrowing and lending, where funds are repaid on the next business day. Loans for a period of 2 to 14 days are categorised as "Notice Money," requiring a notice period for repayment. The primary participants in the Call Money market are Scheduled Commercial Banks, Co-operative Banks, and Primary Dealers. These institutions utilise the Call Money market extensively to manage their day-to-day liquidity, especially to meet their statutory obligations such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements prescribed by the RBI. The Call Rate is a crucial indicator for the RBI, reflecting the short-term liquidity situation and influencing monetary policy decisions. The functioning of the Call Money market is a key topic covered in banking examinations like JAIIB and CAIIB, highlighting its importance in the Indian financial system.

Practical Example

Consider Pragati Bank, a scheduled commercial bank operating in Mumbai. At the end of a business day, Pragati Bank finds itself with a temporary deficit of ₹500 crore, which is crucial for meeting its Cash Reserve Ratio (CRR) requirement with the RBI. Simultaneously, Bharat Bank, another large commercial bank, has a temporary surplus of ₹600 crore that it wishes to lend overnight.

Pragati Bank, needing immediate funds, approaches the interbank Call Money market. Bharat Bank, seeking to earn a return on its temporary surplus, offers to lend. After negotiation, they agree on a Call Rate of, say, 6.50% per annum. Bharat Bank then transfers ₹500 crore to Pragati Bank. The very next morning, Pragati Bank repays the ₹500 crore principal along with the overnight interest (₹500 crore * 6.50% / 365 days) to Bharat Bank. This seamless transaction in the Call Money market allows Pragati Bank to meet its regulatory obligations without disruption and Bharat Bank to utilise its idle funds productively.

Call Money vs Notice Money

The terms Call Money and Notice Money are often confused but refer to distinct segments of the money market based on their tenure and repayment conditions.

Feature	Call Money	Notice Money
Tenure	Strictly overnight (one business day)	2 days to 14 days
Repayment Notice	Repayable on demand, without any prior notice	Repayable on demand, but with a short notice period (e.g., 24 hours)
Primary Use	Meeting immediate, overnight liquidity needs	Managing short-term liquidity mismatches
Nature	More volatile due to overnight nature	Slightly more stable than Call Money

Call Money is used for the most immediate, overnight liquidity adjustments by banks, while Notice Money provides slightly longer-term, though still very short-term, funding. Both are crucial for banks to manage their liquidity and meet regulatory requirements efficiently.

Key Takeaways

• Call Money refers to overnight, unsecured loans exchanged between banks in the interbank money market.
• In India, Call Money loans have a strict tenure of one business day, repayable the next morning.
• Lenders can demand repayment of Call Money at any time without prior notice.
• The primary participants in the Indian Call Money market are Scheduled Commercial Banks, Cooperative Banks, and Primary Dealers.
• Banks primarily use Call Money to manage their short-term liquidity, especially to meet daily Cash Reserve Ratio (CRR) requirements.
• The interest rate for Call Money is known as the Call Rate, reflecting real-time liquidity conditions.
• The Call Money market is regulated by the Reserve Bank of India (RBI).
• Call Money is distinct from Notice Money, which involves loans for 2 to 14 days with a notice period for repayment.

Frequently Asked Questions

Q: Who are the main participants in the Call Money market in India? A: In India, the primary participants in the Call Money market are Scheduled Commercial Banks, Co-operative Banks, and Primary Dealers. These entities engage in lending and borrowing activities to manage their short-term liquidity positions.

Q: Is Call Money a secured or unsecured loan? A: Call Money is an unsecured loan. This means that no collateral is pledged by the borrower to the lender, and the lending is based purely on the creditworthiness and trust between the participating financial institutions.

Q: How does the Call Rate impact the economy? A: The Call Rate is a sensitive indicator of liquidity in the banking system; a high Call Rate suggests tight liquidity, while a low rate indicates surplus funds. It influences other short-term interest rates and helps the RBI assess the effectiveness of its monetary policy measures.