The Indian financial ecosystem consists of two primary components – money and capital. The former is a marketplace for short-term debt funds, mainly comprising institutions like companies, banks, NBFCs, etc. The devices dealt within this system are referred to as money market instruments.
They primarily comprise short-term monetary instruments with the maturity periods ranging from overnight to 1 year. Institutions mentioned above leverage these instruments to raise capital and meet several ends, like mitigating operational expenses, financing expansion and growth, etc.
A few characteristic features of these instruments include -
Businesses can approach several agencies to avail such financial services. With KredX, companies can leverage their unpaid invoices, agreements and more to acquire upfront working capital and growth capital solutions.
In India, there are majorly five types of money market instruments.
The Government of India issues treasury bills to raise short-term capital for financing its various operations. GOI issues it for three maturity periods primarily – 91 days, 182 days, and 365 days or 1 year.
The creditors, i.e. the bill holders, acquire such money market instruments at a discount. At maturity, they are repaid the face value of a treasury bill. The difference between the discounted rate and face value gives the returns a creditor earns.
For example, GOI issues a 91 days T-bill with the face value of Rs. 10 at Rs. 8. In this case, a creditor’s total earnings would equal Rs. 2 x numbers of T-bills held.
Primarily, banks and other such financial institutions issue Certificate of Deposits or CDs. These instruments come with fixed returns. Mostly, companies looking to earn short-term returns invest in CDs. That’s because CDs feature a high minimum investment amount, usually Rs. 1 lakh or more.
The term of this instrument can vary depending on the issuer. Banks usually provide CDs for a tenure of 7 days to 1 year. Institutions resort to this monetary agency to address liquidity crises, often arising due to a lack of deposits and surging credit demand.
Banks are authorised to issue commercial papers. This money market instrument carries a higher risk compared to the ones mentioned above since corporates offer them.
Companies issue commercial papers for a tenure ranging from 7 days to 270 days. Since they are unsecured corporate instruments, commercial papers offer higher returns to creditors compared to government-backed devices.
When companies sell products or services on credit, they draw up invoices noting the amount and the date on which debtors will settle such payments. This document can act as a commercial bill or a bill of exchange if the debtor approves of it.
Once such invoices are signed off as commercial bills, companies can leverage these money market instruments to avail tied up funds in advance of the maturity date. By accessing funds in advance, businesses can streamline their cash flow and operate more efficiently.
KredX allows businesses to use their unpaid invoices and raise working capital within 24 – 72 hours* to address their financial necessities with greater expediency.
Individuals or companies can issue this money market instrument through a commercial bank. It involves a promise to pay a specified sum to the holder on the mentioned date.
Such institution or person issues a banker’s acceptance at a discounted rate and pays in full on maturity. It’s a relatively secure instrument since a commercial bank backs the payment promise.
With money market instruments like commercial bills and CDs, issuers can avail funds more quickly. It allows companies and financial institutions to address pecuniary shortages more efficiently.
Money market instruments come with tenures of up to 1 year. Consequently, the issuer does not have to service debt for an extended period, risking hindering its financial growth. Moreover, maturity periods are flexible. This factor allows issuers to align their objectives with borrowing, more effectively.
Financing via money market instruments is more cost-effective as compared to acquiring funds through stocks. One reason is that the cost of equity financing may be higher than that of debt financing due to the difference in interest payment and profit dilution.
Furthermore, interest on the debt is deducted from earnings before tax calculation. Hence, the issuer needs to pay a lower tax in financing through debt instruments.
These instruments thus make for the easiest and most convenient ways for institutions to raise funds and meet numerous operational expenses without hassle.