Notice money

Banks lend spare cash to each other all the time. The shortest deals are overnight, and that market is called call money.

But a bank sometimes needs cash for a few days, not just one night. Notice money is built for that gap. It is unsecured lending or borrowing between banks for more than one day and up to fourteen days. No collateral changes hands. The lender is trusting the borrower's credit alone.

Both sides deal and report the loan on the same screen used for call money, so a trader watching the interbank market sees call and notice deals side by side.

The workbook (Chapter 1, section 1.3) places notice money as an extension of the interbank call market: uncollateralised lending and borrowing of funds for a period beyond overnight and up to 14 days.

Deals are transacted and reported on the RBI's NDS-CALL (Negotiated Dealing System – Call) platform, the same electronic system used for call money and term money, and this platform is managed by CCIL (Clearing Corporation of India Limited).

Participation in the interbank call/notice/term market is restricted to Scheduled Commercial Banks (SCBs) and Primary Dealers (PDs) — it is not open to corporates, mutual funds or individual investors, unlike the wider money market.

A cooperative bank in Nashik finds itself short of funds for four days because of a temporary mismatch between deposit withdrawals and loan disbursements.

On Monday it borrows Rs 25 crore from a public sector bank in the notice money market for 4 days, at a rate of 6.75% per annum, unsecured. Both banks report the deal on NDS-CALL.

Interest = Rs 25,00,00,000 x 6.75% x 4/365 = Rs 18,49,315 (approx)

On Friday the cooperative bank repays about Rs 25,18,49,315 in total — principal plus that interest — and the deal closes. Had the bank needed the funds for only one night, it would have used call money instead; had it needed them for, say, two months, it would have gone to term money.

Chapter 1 (Introduction to Securities Market, section 1.3, Money Market) lists notice money alongside call money and term money as the three tenor bands of the uncollateralised interbank market. The paper tests the tenor boundaries — notice money is beyond overnight and up to 14 days — and the fact that only SCBs and PDs deal in this market, both dealt and reported on NDS-CALL.

• Notice money is "beyond overnight to 14 days." Call money is exactly overnight (extendable for weekends and holidays); term money starts at 15 days. Mixing up the three boundaries is the standard trap.
• It is unsecured. Do not confuse it with repo, which is collateralised borrowing against securities.
• Only banks and Primary Dealers participate — not mutual funds, corporates or NBFCs, which do appear in other money market instruments such as commercial paper.
• All three tenors — call, notice, term — settle on the same NDS-CALL platform, managed by CCIL.