SHORT TERM

CREDIT
INSTRUMENTS

- ASHWINI CHAVAN
ABSTRACT:
The aim of this research report is to understand what is short-term credit and more
importantly the various instruments of short-term credit. The report will cover all types of
short-term credit instruments in the line of MSMEs, large enterprises as well as individuals.
Businesses need short-term credit because payments for goods and services sold might take
months. Without short term credit instruments, they would have to wait until payments were
received for goods already sold. This would delay the purchases of the raw goods and slow
down the manufacturing of the finished product. Therefore, this research report examines
the significance and role of short-term credit, through an overview of relevant literature and
examples from the real world. The purpose of the research is to study about the various
innovations in the short-term credit instruments and transformations happening in that
sector with the main idea being financial inclusion. Financial inclusion means offering
financial solutions and services to every individual in the society. It primarily aims to include
everybody in the society by giving them the basic financial services. Hence, the research aims
to provide short-term credit to every business, individual and large enterprises thereby
including everyone in the bracket.

INTRODUCTION:
The Payment System of a country provides the channels essential for conducting trade,
commerce and other economic activities smoothly and efficiently. An efficient payment
system not only functions as a lubricant to speed up the flow of liquidity1 in the economy,
but also stimulates economic growth of the country. Payment process is a vital aspect of
financial intermediation; it enables the creation and transfer of liquidity among different
economic agents. A smooth, well-functioning payment system not only ensures efficient
utilization of scarce resources but also eliminates systemic risk.

Payment instruments and mechanisms have a very long history in India. The payment
instruments during the earliest period consisted of coins that were punch marked or cast in
silver and copper, and the credit system2, which included bills of exchange3, were used for
inter-regional transfers of cash.

Short-term credit is a generic term for a revolving line of credit4 granted to a business or an
individual, or a fixed loan with a term of one year or less. Short-term credit is typically used to
meet an immediate but recurring expense. An example is payroll5. If a company bills weekly
and is paid two weeks later, there is a cash flow deficit6. A short-term credit facility, also
known as a line of credit, could be used to cover the payroll until the invoice is paid. When
the payment is received, the line of credit is paid off until it is needed again.
Short term credit instruments are securities that provide businesses, banks or individuals
with large amounts of low-cost capital for a short time. The period is overnight, a few days,
weeks, or even months, but always less than a year.

Historically, the use of bills of exchange was common in busy commercial centres. Indian
bankers also issued bills of exchange on foreign countries for financing sea-borne trade.
These bills, which included the insurance premium covering risk, representing safe arrival of
goods, were traded at high discounts and were popular among the traders. During this
period, Pay Orders were issued from the Royal Treasury on one of the provincial treasuries.
They were known as barattes, which were similar to modern drafts or cheques.

During the 12th Century, the most important credit instrument evolved in India was called
hundis7, which is being used even at present. Hundis were used as remittance instruments
(to transfer funds from one place to another); as credit instruments for borrowing money
and also for trade transactions (similar to current bills of exchange).

Under capitalism8, in the capitalist nations, short-term credit is employed in two forms:
commercial credit9, granted by industrial and commercial capitalists to one another in selling
goods (the commodity form), and bank credit (the monetary form).

Short-term credit is used most widely in the seasonal sectors of industry and trade, where
there is a high level of investment in working capital10. Short-term credit is also used for the
circulation of securities11 in the sphere of state credit (the issue of treasury bills12 and
certificates with terms from three months to one year, designed to attract capital free for
short periods of time) and is closely related to stock market speculation. Loans made against
securities to stock-market brokers and dealers are an important item in the assets of
capitalist banks. Short-term credit has also spread widely in the area of foreign trade, where
it is used in crediting business deals.

Under socialism13, short-term credit operates in the form of direct bank credit. Short-term
credit is granted to all sectors of the national economy for satisfying short-term needs for
borrowed circulating assets, and it is also extended in the form of consumer credit14.
Industry and trade receive the largest share of the total short-term credit paid out to the
economy. The short-term credit is repaid as the circulation of the funds is completed, that is,
as the funds are freed principally through the sale of the product. For certain types of loans,
the repayment dates are fixed ahead of time. Thus, the maximum term fixed for the use of
payment or bank credits is 30 days, whereas loans for temporary needs are granted for up to
60 days.

KEY TERMS:
1. liquidity - describes the degree to which an asset or security can be quickly bought or
sold in the market at a price reflecting its intrinsic value. In other words: the ease of
converting it to cash
2. credit system - agreement between a lender and a borrower, who promises to repay
the lender at a later date, generally with interest
3. bills of exchange - written order used primarily in international trade that binds one
party to pay a fixed sum of money to another party on demand or at a predetermined
date
4. line of credit - a pre-set amount of money that a bank or credit union has agreed to
lend you. You can draw from the line of credit when you need it, up to the maximum
amount
5. payroll - total amount of wages paid by a company
6. cash flow deficit - insufficiency of amounts on deposit to pay operating expenses
when due
7. hundis - financial instrument that developed in Medieval India for use in trade and
credit transactions. Used as a form of remittance instrument to transfer money from
place to place, as a form of credit instrument to borrow money and as a bill of
exchange in trade transactions
8. capitalism - an economic and political system in which a country's trade and industry
are controlled by private owners for profit, rather than by the state
9. commercial credit - line of credit offered to business that the business can use to pay
unexpected expenses, or expecting operating expenses when there is a lack of
available cash. often used by companies to help fund new business opportunities or
to pay for unexpected charges.
10. working capital - financial metric which represents operating liquidity available to a
business, organization, or other entity. Capital of a business which is used in its day-
 to-day trading operations, calculated as the current assets minus the current
liabilities.
11. security - a tradable financial asset
12. treasury bills - instruments for short term (maturities less than one year) borrowing
by the Central Government.
13. socialism - system in which the production and distribution of goods and services is a
shared responsibility of a group of people. In a state of socialism, there is no privately
owned property.
14. consumer credit - personal debt taken on to purchase goods and services. e.g. Credit
card

INDUSTRY OVERVIEW:
HISTORY:
Before studying the Indian money market in the changing environment of mid-eighties and
nineties, let us have a bird’s eye view of the market in pre and post-independent India. Paper
currency was used in India since the beginning of the nineteenth century. While the volume
increased from Rs.11 Crore in 1874 to Rs.1199 Crores in 1948, the circulation increased from
Rs.10 Crores to Rs. 1188 Crores during the same period. The total money supply increased
from Rs.285 Crores in 1935 to Rs.1833 Crores in 1950.
The foundation of modern banking was laid with the establishment of the three Presidency
Banks, namely, the Bank of Bengal (1806), the Bank of Bombay (1840) and the Bank of
Madras (1846). In 1900 there were nine joint stock banks, eight exchange banks and the
three presidency banks with Rs.32 Crores deposit which increased to Rs.957 Crores in 1948.
In 1921 the three Presidency Banks were amalgamated to form the Imperial Bank of India.
The money market was without a proper Central Bank of India until 1935 when the Reserve
Bank of India was established.

When the RBI was set up the Indian money market remained highly disintegrated,
unorganized, narrow, shallow and therefore, very backward. The planned economic
development that commenced in the year 1951 market an important beginning in the annals
of the Indian money market. The nationalization of banks in 1969, setting up of various
committees such as the Sukhmoy Chakravarty Committee (1982), the Vaghul working group
(1986), the setting up of discount and finance house of India ltd. (1988), the securities trading
corporation of India (1994) and the commencement of liberalization and globalization
process in 1991 gave a further fillip for the integrated and efficient development of the
Indian money market.
Around 1950 the Banking System comprised the RBI, Cooperative Banks, Exchange Banks and
Indian Joint Stock Banks. Treasury Bills were first issued in India in October, 1917. Originally
these bills were of different maturities of three, six, nine and twelve months. The number of
total TBs increased from Rs.49 Crores in 1919 to Rs.99 Crores in 1948. The interest rates
differed from bank to bank as well as from region to region, the highest being in Madras. The
Government securities increased from Rs. 2 Crores in 1890 to Rs.382 Crores in 1947, the major
players in this market being banks, Life Insurance Company, Princes, princely states and private
trusts.

In the post-Independence and pre 1987 period, the money market consisted of the following
segments/components: (a) the call money market, (b)the inter-bank term deposit, (c)
participation certificate market, (d)commercial bills market, (e) Treasury Bills market and (f)
intercorporate market. The participants during the same period in the call money market
were commercial banks and co-operative banks as lenders and borrowers and UTI and LIC as
lenders. Prior to December, 1973, the interest rate in call money market was market
determined. Subsequently, ceiling was fixed - 15% in December, 1973, 8.5% in March, 1978
and 10% in April, 1980.

LIC, UTI, QIC and their subsidiaries, ICICI, IRBI and ECGC were permitted to rediscount bills.
During this period some of the market characteristics of Indian economy were continuous
inflation, increasing internal (fiscal) and external deficits, industrialization, urbanization and
significant structural transformation. Functioning with these parameters, all sectors of the
economy have undergone significant changes and the money market has responded to the
changes too.

KEY LEVERS:
Price vs. interest cost - Some suppliers might offer a discount for immediate settlement.
On the other hand, discount should be always compared to the alternative –not taking
advantage of trade credit will induce interest costs. Therefore, it may be worth incurring
some of the costs of taking trade credit (i.e., losing the discount), especially, when interest
rates are high and during the inflation periods when borrowers are favoured over lenders.

Supplier goodwill - If credit is overstepped, suppliers may discriminate against the

customer who does not pay on due time. The effect of the loss of goodwill depends on the
relative market strengths of the parties involved.

Exchange rate risk - Companies that buy on credit where settlement is to be in a foreign
currency, are exposed to risk and potential cost. Therefore, managing exchange rate risk
becomes an important issue.
APR - Annual Percentage Rate (APR) is only one way to compare your financing options. APR
represents the total interest cost, including fees, as an annualized rate which may appear
higher than the actual overall cost of a short-term loan. In many cases, the APR of a short-
term loan can be much higher than the APR for a longer-term loan. But when you consider
other factors, such as total cost of the loan and your business need, you can see a short-term
loan could be a better fit for your business.

Another metric to consider is the overlap between your periodic payments and the returns
on your investment.

For example: If you are planning to use your loan to make an equipment purchase, then the
equipment you buy might start generating returns immediately. In that case, consider
comparing your daily or weekly payment on the loan to the daily or weekly income your
investment will generate. That difference represents your net gain from the investment in
the short-run

Considering ROI When You Borrow - For short-term loans with a defined ROI target, APR
might not be as important a metric as the total cost of the loan relative to the return
on investment. Particularly when purchasing inventory or equipment, the total cost of
financing might be a relevant number when calculating ROI. Considering the total cost of
financing, in addition to APR, when calculating ROI can be a good way to determine if the
financing being considered will help meet your ROI objective or become too expensive—even
with a lower periodic payment or lower APR. Some business owners are concerned the with
higher periodic payments often associated with a short-term loan. If your business has the
cash flow to sustain the payments, the lower total dollar cost of capital can be cheaper, in the
long run, with a short-term loan. Even if the long-term loan has a lower periodic payment or
a lower APR.

Choosing the Right Lender - When it’s time for a business to make a decision on choosing
a lender, there are some things you should consider.

Transparency - The first and most important issue is transparency. If the lender you're
speaking with is not forthcoming regarding their rates, fees, and Terms & Conditions, you
should look for another lender. A lender should have nothing to hide, and clearly layout all
the details for you.

Regardless of the lender a business chooses, a business should consider these questions:
What does the business need the money for?
How much money does the business really need?
How quickly does it need the money?
What types of financing can it qualify for?

Net Interest Margin - Net interest margin is a ratio that measures how successful a firm is
at investing its funds in comparison to its expenses on the same investments. A negative
value denotes that the firm has not made an optimal investment decision because
interest expenses exceed the amount of returns generated by investments. A positive net
interest margin indicates an entity invests its funds efficiently, while a negative
return implies the bank or investment firm doesn't invest efficiently. In a negative net
interest margin scenario, the company is better served by applying the investment funds
toward outstanding debt or utilizing the funds for more profitable revenue streams.

GROWTH OF MONEY MARKET IN INDIA:

While the need for long term financing is met by the capital or financial markets, money
market is a mechanism which deals with lending and borrowing of short-term funds. Post
reforms period in India has witnessed tremendous growth of the Indian money markets.
Banks and other financial institutions have been able to meet the high expectations of short-
term funding of important sectors like the industry, services and agriculture. Functioning
under the regulation and control of the Reserve Bank of India (RBI), the Indian money
markets have also exhibited the required maturity and resilience over the past about two
decades. Decision of the government to allow the private sector banks to operate has
provided much needed healthy competition in the money markets, resulting in fair amount of
improvement in their functioning.
RECENT TRENDS IN THE INDIAN MONEY MARKET:

1. Deregulation of the Interest Rate: In recent period the government has adopted an
interest rate policy of liberal nature. It lifted the ceiling rates of the call money market,
short-term deposits, bills re-discounting, etc. Commercial banks are advised to see the
interest rate change that takes place within the limit. There was a further deregulation
of interest rates during the economic reforms. Currently interest rates are determined
by the working of market forces except for a few regulations.
2. Money Market Mutual Fund (MMMFs): In order to provide additional short-term
investment revenue, the RBI encouraged and established the Money Market Mutual
Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and
individuals. The upper limit of 50 crore investments has also been lifted. Financial
institutions such as the IDBI and the UTI have set up such funds.
3. Establishment of the DFI: The Discount and Finance House of India (DFHI) was set up in
April 1988 to impart liquidity in the money market. It was set up jointly by the RBI,
Public sector Banks and Financial Institutions. DFHI has played an important role in
stabilizing the Indian money market.
4. Liquidity Adjustment Facility (LAF): Through the LAF, the RBI remains in the money
market on a continue basis through the repo transaction. LAF adjusts liquidity in the
market through absorption and or injection of financial resources.
5. Electronic Transactions: In order to impart transparency and efficiency in the money
market transaction the electronic dealing system has been started. It covers all deals in
the money market. Similarly, it is useful for the RBI to watchdog the money market.
6. Establishment of the CCIL: The Clearing Corporation of India limited (CCIL) was set up in
April 2001. The CCIL clears all transactions in government securities, and repose
reported on the Negotiated Dealing System.
7. Development of New Market Instruments: The government has consistently tried to
introduce new short-term investment instruments. Examples: Treasury Bills of various
duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been
introduced in the Indian Money Market.
INDUSTRY ANALYSIS :

SEQUENTIAL SLOWING OF COMMERCIAL SECTOR LOAN GROWTH

Overall commercial sector loan growth for Q4 FY16 has been around 9 %(Y-o-Y). The
LargeExposures1 which account for close to half of Indian banking’s commercial exposure in
Q4FY16 has grown at 10% (y-o-y). The lowest loan growth in Q4 FY16 is observed in the
MidExposures1 where the y-o-y loan growth is at 6%. Mid1 sector accounts for around one-
fifth of the commercial banking exposure of Indian banking system.
For the full year FY16 the banking sector’s commercial exposure grew at slightly above 12%,
with large exposures growing at over 12% and ‘Mid’ at around 10%. Q4 FY16 observed a
moderation in loan growth and early signals tends to suggest limited chances of meaningful
recovery in overall commercial loan growth.

MICRO LOANS: WHERE ARE THEY GROWING, HOW ARE THEY PERFORMING?
State wise Micro Loans Growth
Top 5 states namely Maharashtra, Tamil Nadu, Andhra Pradesh, Gujarat and Uttar Pradesh
account for 47% of the banking sector’s exposure to Micro Segment. Among the top 15
states, Rajasthan has the lowest NPA rate(as of FY16) of 2% for this segment. Gujarat,
Haryana and Madhya Pradesh have sub 5% NPA rate in this segment. West Bengal, Odisha
and Bihar has among the highest NPA rate in this segment.
 PESTEL ANALYSIS:
POLITICAL:
• Political stability and importance of Credit Services sector in the country's economy.
• Risk of military invasion
• Level of corruption - especially levels of regulation in Financial sector.
• Bureaucracy and interference in Credit Services industry by government.
• Legal framework for contract enforcement
• Intellectual property protection
• Trade regulations & tariffs related to Financial
• Favoured trading partners
• Anti-trust laws related to Credit Services
• Pricing regulations – Are there any pricing regulatory mechanism for Financial
• Taxation - tax rates and incentives
• Wage legislation - minimum wage and overtime
• Work week regulations in Credit Services
• Mandatory employee benefits
• Industrial safety regulations in the Financial sector.
• Product labelling and other requirements in Credit Services
•
ECONOMIC:
• Type of economic system in countries of operation – what type of economic system there is
and how stable it is.
• Government intervention in the free market and related Financial
• Exchange rates & stability of host country currency.
• Efficiency of financial markets
• Infrastructure quality in Credit Services industry
• Comparative advantages of host country and Financial sector in the particular country.
• Skill level of workforce in Credit Services industry.
• Education level in the economy
• Labour costs and productivity in the economy
• Business cycle stage (e.g. prosperity, recession, recovery)
• Economic growth rate
• Discretionary income
• Unemployment rate
• Inflation rate
• Interest rates
•
SOCIAL:
• Demographics and skill level of the population
• Class structure, hierarchy and power structure in the society.
• Education level as well as education standard in the industry
• Culture (gender roles, social conventions etc.)
 TECHNOLOGICAL:
• Recent technological developments by the industry
• Technology's impact on product offering
• Impact on cost structure in Credit Services industry
• Impact on value chain structure in Financial sector
• Rate of technological diffusion

ENVIRONMENTAL:
• Weather
• Climate change
• Laws regulating environment pollution
• Air and water pollution regulations in Credit Services industry
• Recycling
• Waste management in Financial sector
• Attitudes toward “green” or ecological products
• Endangered species
• Attitudes toward and support for renewable energy

LEGAL:

• Anti-trust law in Credit Services industry and overall in the country.

• Discrimination law
• Copyright, patents / Intellectual property law
• Consumer protection and e-commerce
• Employment law
• Health and safety law
• Data Protection
CHALLENGES:
Indian money market has a dichotomic structure. It has a simultaneous existence of both
organized and unorganized money markets. The organized structure consists of the RBI , all
scheduled and commercial banks and other recognized financial institutions as mentioned
above. However, the unorganized part of the market consists of local moneylenders,
indigenous bankers, traders, etc. This part of the market is outside the purview of the RBI.
The money market in India has undergone tremendous developments since past twenty
years. However, it is still not free of certain rigidities that are hampering the growth of the
market. They are:

1. Dichotomy between Organized and Unorganized Sectors:

The most important defect of the Indian money market is its division into two sectors: (a) the
organised sector and (b) the unorganized sector. There is little contact, coordination and
cooperation between the two sectors. In such conditions it is difficult for the Reserve Bank to
ensure uniform and effective implementations of monetary policy in both the sectors.

2. Predominance of Unorganized Sector:

Another important defect of the Indian money market is its predominance of unorganised
sector. The indigenous bankers occupy a significant position in the money-lending business in
the rural areas. In this unorganized sector, no clear-cut distinction is made between short-
term and long-term and between the purposes of loans. These indigenous bankers, which
constitute a large portion of the money market, remain outside the organized sector.
Therefore, they seriously restrict the Reserve Bank’s control over the money market.

3. Wasteful Competition
Wasteful competition exists not only between the organised and unorganised sectors, but
also among the members of the two sectors. The relation between various segments of the
money market are not cordial; they are loosely connected with each other and generally
follow separatist tendencies. For example, even today, the State Bank of Indian and other
commercial banks look down upon each other as rivals. Similarly, competition exists between
the Indian commercial banks and foreign banks.

4. Absence of All-India Money Market

Indian money market has not been organised into a single integrated all-Indian market. It is
divided into small segments mostly catering to the local financial needs. For example, there is
little contact between the money markets in the bigger cities, like, Bombay, Madras, and
Calcutta and those in smaller towns.

5. Inadequate Banking Facilities:

Indian money market is inadequate to meet the financial need of the economy. Although
there has been rapid expansion of bank branches in recent years particularly after the
nationalization of banks, yet vast rural areas still exist without banking facilities. As compared
to the size and population of the country, the banking institutions are not enough.
6. Shortage of Capital:
Indian money market generally suffers from the shortage of capital funds. The availability of
capital in the money market is insufficient to meet the needs of industry and trade in the
country. The main reasons for the shortage of capital are: (a) low saving capacity of the
people; (b) inadequate banking facilities, particularly in the rural areas; and (c) undeveloped
banking habits among the people.

7. Seasonal Shortage of Funds:

A Major drawback of the Indian money market is the seasonal stringency of credit and higher
interest rates during a part of the year. Such a shortage invariably appears during the busy
months from November to June when there is excess demand for credit for carrying on the
harvesting and marketing operations in agriculture. As a result, the interest rates rise in this
period. On the contrary, during the slack season, from July to October, the demand for credit
and the rate of interest decline sharply.

8. Diversity of Interest Rates:

Another defect of Indian money market is the multiplicity and disparity of interest rates. In
1931, the Central Banking Enquiry Committee wrote: “The fact that a call rate of 3/4
per cent, a hundi rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of
6.25 per cent and a Calcutta bazar rate for bills of small trader of 10 per cent can exist
simultaneously indicates an extraordinary sluggishness of the movement of credit between
various markets. The interest rates also differ in various centres like Bombay, Calcutta, etc.
Variations in the interest rate structure is largely due to the credit immobility because of
inadequate, costly and time-consuming means of transferring money. Disparities in the
interest rates adversely affect the smooth and effective functioning of the money market.

9. Absence of Bill Market

The existence of a well-organized bill market is essential for the proper and efficient working
of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of
India, the bill market in India has not yet been fully developed. The short-term bills form a
much smaller proportion of the bank finance in India as compared to that in the advanced
countries. Many factors are responsible for the underdeveloped bill market in India:
• Most of the commercial transactions are made in terms of cash.
• Cash credit is the main form of borrowing from the banks. Cash credit is given by the
banks against the security of commodities. No bills are involved in this type of credit.
• The practice of advancing loans by the sellers also limits the use of bills.
• Heavy stamp duty discourages the use of exchange bills.
• Absence of acceptance houses is another factor responsible for the
underdevelopment of bill market in India.
• In their desire to ensure greater liquidity and public confidence, the Indian banks
prefer to invest their funds in first class government securities than in exchange bills.
• The RBI also prefers to extend rediscounting facility to the commercial banks against
approved securities.
COMPARISON OF INDIAN MONEY MARKET WITH DEVELOPED AND DEVELOPING
COUNTRIES
MONEY MARKET IN A DEVELOPED ECONOMY (with the US in reference)
The domestic money market in the United States carries out the largest volume of
transactions of any such market in the world; its participants include the most heterogeneous
group of financial and nonfinancial concerns to be found in any money market; it permits
trading in an unusually wide variety of money substitutes; and it is less centralized
geographically than the money market of any other country. Although there has always been
a clustering of money market activities in New York City and much of the country’s
participation in the international money market centers there, a process of continuous
change during the 20th century has produced a genuinely national money market.
The unit banking system: This system has led inevitably to striking differences between
money market arrangements in the United States and those of other countries. At times,
some smaller banks almost inevitably find that the wholesale facilities of the money market
cannot provide promptly the funds needed to meet unexpected reserve drains, as deposits
move about the country from one bank to another.

MONEY MARKET IN DEVELOPING COUNTRIES

Well-developed money markets exist in only a few high-income countries. In other countries
money markets are narrow, poorly integrated, and in many cases virtually nonexistent.
Despite the many differences among countries, one can say in general that the degree of
development of a country’s financial system, including its money markets, is directly related
to the level of its economy. Most developing countries, except those having socialist systems,
have the encouragement of money markets as a policy objective, if only to provide outlets for
short-term government securities. At the same time many of these governments pursue low-
interest-rate policies in order to reduce the cost of government debt and to encourage
investment.
Such policies discourage saving and make money market instruments unattractive.
Nevertheless, a demand for short-term funds and a supply of them exist in all market-
oriented economies. In many developing countries these pressures have led to “unorganized
money markets,” which are often highly developed in urban areas Such markets are
unorganized because they are outside “normal” financial institutions; they manage to escape
government controls over interest rates; but at the same time they do not function very
effectively because interest rates are high and contacts between localities and among
borrowers and lenders are limited.
CHANGES:
1. Nationalization of commercial banks to boost money market in India
Commercial banks were nationalized in order to stimulate the growth of Indian money
market. The nationalization enabled banking sector to provide more loans to agriculture and
discount agricultural bills.

2. Introduction of various relief acts to boost up growth of Indian money market

The passing of Public Debt Relief Act has released many people, especially in rural areas from
the clutches of the money lenders. The Urban Debt Relief Act has given relief to the urban
poor. In 1988, the discount and finance house was set up for discounting commercial
bills brought by commercial banks.

3. Steps taken to curb disparity in Interest rates

The interest rate of commercial banks which was controlled by RBI has been deregulated.
This curtails the adverse effect of disparity in Interest rates among various money markets
and in turn helps boost up the growth of Indian money market.

4. Relaxation for foreign institutions by Indian Government

More relaxation for foreign institutions to invest foreign funds in the Indian money market.
This brings in more liquidity during the period of busy season (between June to February).

5. Introduction of Credit rating for commercial paper and promissory notes

Credit rating has been introduced for promissory notes as well as commercial paper by which
the credibility of these instruments has gone up. Credit worthiness of these instrument plays
a major role for the growth of Indian money market.
The global credit market is facing a massive disruption following the emergence of new and
revolutionary business funding methods and the rapid growth of alternative lending options.
Start-ups no longer have to rely on bank loans or mainstream lending institutions for capital.
The competition in the business finance marketplace is heating up with crowdfunding
platforms driving growth for start-ups offering disruptive products or businesses looking for
expansion capital.
On the other hand, the lending market has been disrupted by peer-to-peer lending platforms
with the global peer-to-peer lending market expected to grow at a CARG Value of 51.5
percent% through 2022, when it will have a market value of about $460 billion. As such, peer-
to-peer lending platforms like Zopa and LendingClub have made the highlights regarding the
disruption of the credit market.
However, the significantly ‘less popular’ short-term lending market, which is characterized by
highly accessible and flexible quick loans, has flown under the radar as it continues to be the
preferred choice for borrowers whose credit scores might not appeal to mainstream lenders.
Alternative lending has improved credit accessibility for SMEs
One of the main catalysts for global economic growth is the ease of accessibility of financing
for small and medium-sized businesses. Technology has been central to the increased
accessibility of credit, and short-term loans, in particular, have been among the most vibrant
products. The short-term lending platforms are leveraging the latest technological
advancements to address a crucial gap in the credit market.
Their ability to lend even to those whose credit scores are far from sufficient has helped
them to stay in business as they continue to address a segment of the market that banks and
other mainstream lenders would not issue loans to. And some SMEs and individuals are
finding some of their products like same day payout loans very effective especially when it
comes to addressing business or personal emergencies. Loan application, approval,
processing, and disbursement of the funds can be done within a matter of hours, in some
cases minutes.
Short-term loans have been one of the most vibrant products when it comes to the
accessibility of credit used by SMEs.

Instant mobile loans are also on the rise

In Africa, which is host to some of the fastest growing economies in the world, SMEs are seen
as the best option when it comes to creating future employment opportunities for those
graduating from college. As such, governments have created an environment that is flexible
enough to allow alternative lending platforms to provide financing for businesses and
individuals looking for quick loans.
CONSEQUENCES:
Small scale industries boost: The sectors that were lagging behind like small-scale
industries and agriculture got a boost. This led to an increase in funds and thus increases in
the economic growth of India

Agriculture credit: In 2004, a policy to double the flow of agricultural credit within three
years was announced. Only public banks could make this happen. New branch authorisation
policy: In 2005, the RBI brought in a new branch authorisation policy. Permission for new
branches began to be given only if the RBI was satisfied that the banks concerned had a plan
to adequately serve underbanked areas and ensure actual credit flow to agriculture. By 2011,
the RBI further tightened this procedure. It was mandated that at least 25% of new branches
were to be compulsorily located in unbanked centres.

Priority-sector lending: The concept of priority-sector lending was introduced. All banks had
to compulsorily set aside 40% of their net bank credit for agriculture, micro and small
enterprises, housing, education and “weaker” sections.

Differential interest rate scheme: A differential interest rate scheme was introduced in
1974. Under this scheme, Loans were provided at a low interest rate to the weakest among
the weakest sections of the society.

Market Integration - The success of monetary policy depends on the speed of adjustment
in money market rates in response to changes in the policy rates for effective transmission of
monetary policy impulses to the economy. This, in turn, depends on the development and
integration of various market segments. In line with the progress of financial sector reforms
in India, various segments of the money market are getting increasingly integrated as
reflected in the close co-movement of rates in various segments. The structure of returns
across markets has shown greater convergence after the introduction of LAF, differentiated
by maturity, liquidity and risk of instruments.

Strengthening of linkages amongst market segments suggests greater operational

efficiency of markets as well as the conduct of monetary policy. On the flip side, however,
increased integration has resulted in increased contagion as turbulence originating in one
market segment is swiftly transmitted across all segments. Recent experience of financial
market operations in various countries suggests that market integration tends to strengthen
during episodes of volatility, pointing to a swifter transmission of market pressures from one
segment to another. This imposes additional constraints on the management of market
conditions necessitating simultaneous policy actions in various market segments to limit
contagion in the presence of asymmetric integration of markets. The monetary policy
reaction has been in terms of a combination of instruments, including regulatory action, to
ensure the rapid restoration of stability in financial markets.
FUNDING LANDSCAPE
If we look at the funding landscape, recently PayU acquired stake in PaySense; to merge it
with LazyPay.
Accroding to Economic Times, PayU’s will merge LazyPay and PaySense to build a full-stack
digital lending platform in India. It plans will acquire a controlling stake in PaySense and all its
assets at a valuation of $185 million. PayU will also inject a sum of $200 million in the new
merged entity in the form of equity capital, where $65 million will be immediately invested,
and the remaining corpus will be infused over the next two years to help the loan book grow.

Siddhartha Jajodia, Global Head of Credit, PayU said, “This merger is the next step in our
journey as we accelerate our vision for credit in India. We’re delighted to welcome Prashanth
and his experienced team as we integrate this fast-growing business and build a full-stack
digital lending platform aligned with PayU’s overall plan of orchestrating a
broader fintech ecosystem in the region.”

The plan of merger is supported by BCG research, which shows India’s digital lending market
representing a $1 trillion opportunity in the next five years. PayU believes that the
combination would bring together two highly complementary companies.

Prashanth Ranganathan, founder and CEO, PaySense said, “We’re excited to start bringing
our personal loan product to more consumers throughout India and truly democratise
credit.” Moreover, as per the current plan, Ranganathan will lead PayU’s credit business in
India as the CEO of the new enterprise.

PayU also said that the new credit platform will enable third parties such as non banking
financial companies (NBFCs), banks and alternate lenders to co-lend access credit digitally.
“The joint team will combine its complementary assets, capabilities and talented teams with
the goal of making access to credit quick, seamless and widely available for the underserved
in India and drive higher customer satisfaction”, the release stated.

PayU believes that LazyPay’s deep experience in driving customer acquisition and
engagement combined with PaySense’s abilities will serve more of the “new-to-credit” Indian
population.

Also, Global investors ready with $3 billion kitty to enter India’s credit market
India's structured credit market is likely to witness an investment of more than $3 billion in
the current year as contracts get credibility with the bankruptcy law turning effective. Allianz,
Cerberus, and South Korea’s Meritz are among investors buying assets and many of them are
in India for the first time.

“A global wallet of circa $3 billion is waiting to be deployed in structured credit space in

India,” said Shantanu Sahai, head of debt at Nomura India. “A number of standalone credit
funds, or those housed within larger global private equity funds, have viewed the current
market dislocation and the steady maturing of the Indian credit markets as an incentive to
invest into India in a significant way. These funds typically expect a return of 15-25 per cent
by investing in a range of credits — from pedigreed promoters facing liquidity issues all the
way to distressed debt opportunities.”

Many global investors are looking for the first time to deploy $3 billion int o India’s credit
market, especially the structured credit segment. Experts say the credit market has matured
and good companies are seeing the benefit of better risk pricing. When domestic investors
such as mutual funds and banks slammed doors on many NBFCs after a series of defaults in
the sector and eroded investor confidence in the segment, global funds including Allianz,
Cerebrus and South Korea’s Meritz stepped in to take exposure.
With the new Insolvency and Bankruptcy Code (IBC), the regulatory environment and the
difficulties in ensuring creditor rights in a timely manner have been addressed, attracting
global investors. Allianz and South Korea’s Meritz have invested in Edelweiss’ stressed funds
to take exposure in the distressed space. After the Essar Steel judgement, experts expect
global funds to invest in India. Funds like Lone Star, Cerberus, Brookfield and Varde Partners
are likely to raise their investment in India.

CONCLUSION:
Since the early 1990s, the money market has undergone a significant transformation in terms
of instruments, participants and technological infrastructure. Various reform measures have
resulted in a relatively deep, liquid and vibrant money market. The transformation has been
facilitated by the Reserve Bank’s policy initiatives as also by a shift in the monetary policy
operating procedures from administered and direct to indirect market-based instruments of
monetary management. The changes in the money market structure and monetary policy
operating procedures in India have been broadly in step with the international experience
and best practices.
Along with the shifts in the operating procedures of monetary policy, the liquidity
management operations of the Reserve Bank have also been fine-tuned to enhance the
effectiveness of monetary policy signalling. The increasing financial innovations in the wake
of greater openness of the economy necessitated the transition from monetary targeting to a
multiple indicator approach with greater emphasis on rate channels for monetary policy
formulation. Accordingly, short-term interest rates have emerged as a key instrument of
monetary policy since the introduction of LAF, which has become the principal mechanism of
modulating liquidity conditions on a daily basis.
In line with the shifts in policy emphasis, various segments of the money market have been
developed. The call money market was transformed into a pure inter-bank market, while
other money market instruments such as market repo and CBLO were developed to provide
avenues to non-banks for managing their short-term liquidity mismatches. Furthermore,
issuance norms and maturity profiles of other money market instruments such as CPs and
CDs were aligned for effective transmission of policy intent across various segments. The
abolition of ad hoc Treasury Bills and introduction of Treasury Bills auction have led to the
emergence of a risk free rate, which acts as a benchmark for pricing other money market
instruments. The increased market orientation of monetary policy and greater integration of
domestic markets with global financial markets, however, have necessitated the
development of an institutional framework for appropriate risk management practices.
Accordingly, the Reserve Bank’s emphasis has been on encouraging migration towards the
collateralised segments and developing derivatives for hedging market risks. This has been
complemented by the institutionalisation of CCIL as a central counterparty to mitigate the
settlement risk. The upgradation of payment technologies has further enabled market
participants to improve their asset liability management. Cumulatively, these measures have
helped in containing volatility in the money market, thereby improving the signalling
mechanism of monetary policy while ensuring financial stability.
Notwithstanding the considerable progress made so far, there is a need to develop the
money market further, particularly in the context of a move towards fuller capital account
convertibility. Further development of the money market calls for better ALM practices by
banks and other market participants, which would enable banks to evolve appropriate
prudential limits on their call money exposures from their internal control systems. In order
to develop the term money market, participants need to take a long-term view on interest
rates. Furthermore, there is a need to expand the eligible set of underlying collateral
securities for repo transactions. This would not only facilitate liquidity management but also
promote the development of underlying debt instruments. Finally, liquidity forecasting
techniques need to be further refined for proper assessment of liquidity conditions by the
Reserve Bank. This would facilitate finer changes in the operating procedures of liquidity
management and enable the Reserve Bank to flexibly meet the emerging challenges. As these
developments take place, it needs to be understood that monetary management in India will
continue to be conducted in an intermediate regime that will have to respond creatively and
carefully to the emerging and evolving monetary and macroeconomic conditions, both
domestic and global.

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Note:
Fund Flow Analysis is missing. Could not find much detailed information regarding
this part hence could not complete it. Tried researching about the fund flow
statements of the companies that provide short term credit instruments and also
banks but I could not find much regarding this part.