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Sunday, August 1, 2010

Money Market

Money MarketMoney market is an important ingredient of the financial market. The market for short-term securities is known as the money market. It deals with those debt instruments and other financial instruments that are issued with maturity of one year or less.In the financial market, money market is proving very significant. Money market instruments cover short-term, marketable, liquid, low-risk debt securities. Sometimes money market instruments are called just cash-equivalents. In Nepal, bridge financing is a kind of money market instrument that can be used. Money market provides a channel for the exchange of financial assets for money. Loan is made available to meet purely short-term cash needs of the firm and institutions on current account rather than on the capital account. Money market serves the purpose of meeting the short-term cash requirements of the companies, individual households, financial institutions and government as well as it helps in providing investment outlets for all those having surplus funds to invest in promising securities less than one year of maturity. It is thus best for making effective use of the idle funds on a temporary basis.
There is no denying the fact that money market is slowly growing in our country. It is because money market has been able to meet the temporary short term credit needs of the government although companies and firms have not yet been able to capture the importance of money market due to failure to infuse credit worthiness of short-term market instruments in the country.

International Money Market
International money market is proving very significant fro international perspective. The flow of funds across the national boundaries through the medium of international money market is an accepted reality. Computer revolution and modern developments of software has made the world small in a way that financial transactions can be undertaken through the communications networks and other interconnections and linkages with old money market system. As this being the case, a wide variety of short-term and medium-term money market instruments have come into use for serving the needs of international investors.
Different types of loans are found to dominate the functioning pattern and usual transactions in international money market. These has not only enhanced the size of the market but at the same time infuencing the composition and constitution of the international money market. Among all, the most widely used instruments in international money market are syndicated loans and Euro-commercial papers. Syndicated loan is a loan made by the consortium of banks to a single borrower and it is priced as a spread above LIBOR (London Inter-Bank Offered Rate). LIBOR is the rate that banks participating in international debt market charge to each other for short-term loan. In most cases, floating rate is applied to reflect the current LIBOR.
Another instrument used in international money market is the Euro-commercial paper usually denominated in dollars. Euro-commercial paper has been crowding out the syndicated loans because the industrial firms in international money market have credit ratings better than those rated by banks. In international money market, there also exist Note-issuance facilities that are a form of medium term lending through a variety of instruments at floating rate notes. Banks buy thge borrower's notes or feds funds to the borrower. Moreover, international money market provides both committed and back-up facilities to making the loans as promised to the borrower. There is a case of back-up facilities that involve uncommitted back-up facilities that involve only an expressed intention but no commitment to lend under specific circumstances.


Money Market In Nepal
The money market is founded on the large amounts of funds, in which companies, banks and other financial institutions wish to hold in highly liquid form to meet short-term fluctuations in their finance. Generally, the money market is divisible under two sector - organised and unorganised. The organised market comprises Nepal Rastra Bank - the central bank and commercial banks. It is called organised because the activities of commercial banks are systematically co-ordinated by the central bank. The unorganised because Nepal Rastra bank does not systematically co-ordinate the activities of these indigenous bankers and moneylenders.
Nepalese money market is not well developed in terms of securities dealt with and institutions that deal completely in money market instruments are absent. Similarly, many of the instruments which are popular in developed money market like commercial paper, bankers' acceptances, have not yet entered the nepalese money market. Therefore the institutions that operate in the money market in Nepal are basically Nepal Rastra Bank and commercial banks and instruments dealt are treasury bills, commercial bills and short-term bank loan.
Treasury bill market is a major component of money market in Nepal, started in the year 1961-62. since then, it has been an important source of short-term fund for the government except for few years taking from 1968 to 1974. But, because of low yield and absence of active secondary market with brokers, it remained mostly at the hand of the central bank.
Commercial banks are major borrowers and lenders in the short-term money market. Although, commercial banks have been dealing with commercial bnills since long, the bill market has its position as underdeveloped in Nepal. Only a small amout of commercial banks' lending is against export and domenstic bills and larger amount is invested in import bills and LCs and the purchase of export bills.
Besides treasury and commercial bills, short-term credit by commercial banks also forms another important part of money market in Nepal. Though short-term credit has not fully developed to encourage growth of money market in Nepal, even then it has been the convenient vehicle for lending and borrowings. This type of finance was largely on the monopoly of commercial banks in the past but in recent years, NIDC and other development banks also provide such finance.
In Nepal, money market is in initial phase. It is underdeveloped in terms of securities dealt with and institutions involved in the market. Many money market instruments and institutions are still absent in Nepal. Treasury bill market and short-term credit by commercial bill market is evolving steadily despite numerous setbacks.

6 comments:

  1. Excellent stuff with wonderful information! I'm new here and loving the post! Thanks for sharing this great info!Keep it up!



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  5. quite practical information, very much useful content.

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