Term money

The interbank market has three bands by tenor. Overnight is call money. Beyond overnight up to 14 days is notice money. Term money is the longest of the three: unsecured lending or borrowing between banks for 15 days to 1 year.

A bank planning further ahead than a couple of weeks — funding a known outflow next quarter, say — borrows term money instead of rolling short deals again and again. The lending bank locks in a rate for a fixed period rather than lending overnight and having to re-lend every day.

The workbook (Chapter 1, section 1.3) defines it as an extension of the interbank call market for uncollateralised lending and borrowing of funds for a period between 15 days and 1 year. Like call and notice money, term money transactions are dealt and reported on the RBI's NDS-CALL platform, managed by CCIL.

Participation is again restricted to Scheduled Commercial Banks and Primary Dealers. There is no collateral: the whole interbank call/notice/term family relies on the counterparty bank's standing rather than security pledged against the loan.

A private sector bank expects a large outflow of deposits in 90 days, when a bulk corporate fixed deposit matures and is expected to be withdrawn. Rather than borrow overnight repeatedly until then, it borrows Rs 50 crore of term money for 90 days from another bank at 7.10% per annum.

Interest = Rs 50,00,00,000 x 7.10% x 90/365 = Rs 87,53,425 (approx)

At the end of 90 days the borrowing bank repays the principal plus roughly Rs 87.5 lakh in interest. Because the rate was fixed for the full 90 days at the start, the borrowing bank is not exposed to a rate spike if overnight rates jump midway through the period — the trade-off it accepts is a rate that need not be as low as an overnight call money rate.

Chapter 1 (Introduction to Securities Market, section 1.3) sets out call, notice and term money as one family, distinguished only by tenor. Term money's 15 days to 1 year band, and the fact that it too is dealt on NDS-CALL and restricted to SCBs and PDs, are the examinable facts.

• Term money starts at 15 days, not 14. Notice money's upper limit (14 days) and term money's lower limit (15 days) sit right next to each other — a classic off-by-one trap.
• Unsecured, like call and notice money. Do not confuse the tenor with a repo, which is always collateralised.
• Same NDS-CALL platform for call, notice and term money. The instrument changes; the venue does not.
• Only SCBs and Primary Dealers deal in this market, unlike commercial paper or certificates of deposit, which have a wider participant base.