(i) Debt Securitisation:
The buzzword in the money market is now debt securitisation, which refers to converting retail loans into whole sale loan and their reconverting into retail loans. For example, a bank lends ` 10 lakhs each to 300 borrowers as part of its loan portfolio. The total debt thus on the books of the bank will be ` 30 crores. By way of securitisation, the bank can break the entire portfolio of loans/debt of ` 30 crores into a paper of ` 300 each for instance, and market it in the secondary market to investors. The philosophy behind the arrangement is that an individual body cannot go on lending sizable amount for about a longer period continuously but if the loan amount is divided in small pieces and made transferable like negotiable instruments in the secondary market, it becomes easy to finance large projects having long gestation period.
The experiment has already been initiated in India by the Housing Development Finance Corporation (HDFC) by selling a part of its loan to the Infrastructure Leasing and Financial Services Ltd. (ILFS) and has therefore become a trendsetter for other kinds of debt securitisation as well.
The Industrial Credit and Investment Corporation of India (ICICI) as well as other private financial companies have been trying similar deals for lease rentals. Some finance companies are also following the same route for financing promoters contribution for projects. The HDFC has entered into an agreement with ILFS to securitise its individual housing loan portfolio to the extent of ` 100 crores.
Debt Securitisation will thus provide liquidity to the instrument. As market maker, ILFS will quote a bid and offer a price for the paper. Given the scarcity of resource and to provide flexibility to investors, innovative financing techniques such as debt securitisation which will mobilise additional resources through a wider investor base, is a step in the right direction.
A major trend in the international financial markets in recent years has been towards securitisation of long dated assets, held by them as security/mortgage against credit to customers.
(i) Money Market Mutual Funds (MMMFs):
One of the recent development in the sphere of money market is the establishment of Money Market Mutual Funds, the guidelines of which have been made public by the Reserve Bank of India. Money Market Mutual Funds (MMMFs) can be set up by the banks and public financial institutions. There can also be Money Market Deposit Accounts (MMDAs).
Limit: The limit for raising resources under the MMMF scheme should not exceed 2% of the sponsoring bank’s fortnightly average aggregate deposits. If the limit is less than ` 50 crores for any bank, it may join with some other bank and jointly set up MMMF. In the case of public financial institutions, the limit should not exceed 2% of the long term domestic borrowings as indicated in the latest available audited balance sheets.
Eligibility: MMMFs are primarily intended for individual investors including NRIs who may invest on a non–repatriable basis. MMMFs would be free to determine the minimum size of the investment by a single investor.
Minimum rate of return: There is no guaranteed minimum rate of return.
Lock in period: The minimum lock in period would be 46 days.
Deployment of capital: The resources mobilised by MMMFs should be invested exclusively in various money market instruments.
Investment limits:
(1) Treasury bills and dated government securities having an unexpired maturity upto 1 year – Minimum 25%.
(2) Call/notice money – Minimum 30%.
(3) Commercial Paper – Maximum 15%. The exposure to CP issued by an individual company should not be more than 3%.
(4) Commercial bills accepted/co–accepted by banks – Maximum 20%.
(5) Certificate of deposits – No limit.
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