Call Money: Meaning and Advantages

Call money is unsecured borrowing for very short periods—usually one day or even overnight—that banks do between themselves. This is a way to meet daily liquidity needs and an important tool for signaling the call rate, which works on the basis of supply and demand. 

The call money market is similar to a financial playground for the banks and institutions, where they lend or borrow money for the short term—usually one day. For example, if Bank A has surplus money, and Bank B needs funds urgently to honour its obligations. Bank A may lend to Bank B money at a specific rate and only for one day. The overnight setting thus enables the day to manage the daily cash flow for the banks effectively. It ensures they are meeting the regulatory requirement without holding an excess reserve.

Explore: Online Banking Courses and Certifications

Table of Content

• What is Call Money?
• Call Money Market Definition
• How Call Money Works
• Advantages of Call Money
• Money at Call and Short Notice

What is Call Money?

Call money is also known as Money at Call. It is, in fact, a very short-term loan meant to address issues that arise in banks and financial institutions regarding their everyday liquidity requirements. It is also operated overnight or for a few days without any collateral. The interest rates for call money loans can fluctuate daily, influenced by the market's demand and supply of funds.

Call money provides banks with unique flexibility. It allows them to adjust their reserves swiftly, either to meet depositors' demands or to seize lucrative, short-term investment opportunities. This adaptability is a key advantage of call money.

Call Money Market Definition

The Call Money Market is a vital part of the financial market. It's where banks and other financial institutions lend and borrow funds for their short-term requirements, typically ranging from one day to a few days of maturity. This market enables participants to manage their liquidity needs effectively and ensures they can fund their day-to-day operations. 

The interest rates in this market change daily, reflecting the supply and demand for funds. A country's banking system must maintain a good balance and smooth operation. This leaves room for quick change, which is necessary in cash reserves.

How Call Money Works

Call money is a mechanism for short-term borrowings and lending among financial institutions. Here is the most basic example of call money operations:

Need for Funds: The requirement over and above the projection may also be for maintaining short-term liquidity requirements like reserve requirements or funding uncalled-for withdrawals by the depositors from the institution, as set by the central bank from time to time. 

Borrowing and Lending: Borrowing and lending short-term money is beneficial at such times of instant need. In the case of borrowings, the institution borrows money from another institution for a short term, often overnight, specifying the period it can be returned and the rate to be paid back with interest. The lending is usually unsecured, hence an easy process. 

Interest Rate: In other words, it is the rate that determines the interest of call money, while the supply and demand that can be furnished for these short-term funds to the market may vary from day to day.

Repayment: Usually, the borrowed funds, together with the interest, get repaid the next day. Though this period of borrowing can be extended, with the agreement of both parties, the loan can roll over for another day; however, the interest in the new period is revisable, based on current market conditions.

Role of Central Banks: Central banks may also indirectly influence the call money market through their monetary policy operations, which decide the availability and cost of funds.

Importance: The call money market has a very large degree of importance for the liquidity management of the financial system. It offers the opportunity to banks to run their day-to-day cash flows by holding up very large cash reserves without serving any purpose.

Advantages of Call Money

Flexibility: Call money is flexible for managing liquidity day to day. Financial institutions or organizations borrowing or lending call money do it for the shortest possible time, sometimes overnight. This liquidity allows them to change their cash positions according to their immediate requirements.

Efficiency in Liquidity Management: It allows banks to manage their reserve requirements efficiently. With this facility, a bank may lend or borrow from the call money market, which will ensure they meet their regulatory liquidity requirements without having to maintain excess reserves that would draw poor returns.

Cost-Effective: Borrowing through the call money market could be cheaper than other means of obtaining short-term funding. However, it's important to note that, being mostly unsecured and for very short tenure, the rate of interest on call money is very low compared to other borrowings. This low interest rate may not always compensate for the potential risks involved.

No Collateral Required: In the call money market transaction, collateral is not required. This eases the borrowing process and helps minimize the transaction cost, giving an advantage to well-established institutions with a good credit rating.

Supports Monetary Policy: The call money market is of very great use for the conduct of monetary policy by the central bank. In fact, through manipulation, the central bank can indirectly impact the liquidity preference of the public and can influence the short-term money rates in the direction it likes.

Stability of Markets: The call money market's presence helps maintain stability in the whole financial system. This assists institutions in absorbing unexpected liquidity shocks and reduces the related risk of default for failing to meet credit obligations by borrowers. 

Interest Rate in the Call Money Market

The call rate is the rate of interest obtained in the call money market, popularly called the "call rate." It is the rate at which banks lend to and borrow from each other for an overnight period. Every day, the rate stands to be renewed and faces variations based on the supply and demand of short-term funds. It's a crucial benchmark for short-term interest rates in the financial system.

Money at Call and Short Notice

Money at Call and Money at Short Notice are terms used in banking and finance for very short-term loans. They differ little in availability and maturity period.

Money at Call: These are very short-term loans that can be recalled (demanded back) at the lender's discretion without any notice. Commonly, the loans are between 1 to 2 days, mostly used by banks to manage their daily liquidity requirements.

Money at Short Notice: Like call money, money at short notice is money lent for a short term, but it has a slightly longer maturity than call money. The lender may recall such a loan with up to 14 days' notice, which gives slightly more stability in terms of funding than call money.

Differences:

Duration: Call money is for the shortest duration, from overnight to a few days, while short notice money is of a longer tenure and, therefore, up to 14 days can be made.

Notice Period: Call money can be demanded back at any moment without notice, whereas short notice money gives them a short notice period before repayment.

Conclusion

Call money is a big player in the financial ecosystem, offering banks and financial institutions a much-needed flexible and efficient solution for managing their day-to-day short-term liquidity. It also helps facilitate overnight or short-term unsecured advances, maintaining stability and fluidity in the system.

Call money rates are dynamic in nature and depend on supply and demand. They reflect the underlying conditions of the money market and form an essential tool for good financial management.