Call Money, Notice Money and Term Money - Article

Introduction

Banks do not have exactly the same liquidity position every day.

On a particular day, one bank may have surplus funds, while another bank may need funds to meet:

• payment obligations;

• settlement requirements;

• temporary cash-flow mismatches;

• unexpected withdrawals;

• loan disbursements; or

• other short-term liquidity needs.

The money market allows eligible institutions to borrow and lend short-term funds.

Three important unsecured segments are:

• Call Money

• Notice Money

• Term Money

The distinction between them is mainly based on the tenor of borrowing or lending.

Under the RBI's presently operative framework:

• Call Money = overnight

• Notice Money = more than overnight and up to 14 days

• Term Money = more than 14 days and up to one year.

These products fall within Money Market Products under Treasury Products in the current IIBF CAIIB BFM Module C syllabus.

Learning Objectives

After studying this topic, you should be able to:

• explain Call Money, Notice Money, and Term Money;

• distinguish the three products according to tenor;

• understand why banks borrow and lend through these markets;

• identify their unsecured nature;

• understand the eligible participants and trading framework;

• explain how treasury uses these products for liquidity management; and

• identify common CAIIB examination traps.

Understanding the Money Market

The money market deals primarily with short-term funds and financial instruments.

Its major purpose is to connect entities having temporary surplus funds with entities having temporary funding requirements.

For bank treasury, the money market is particularly important because liquidity can change continuously due to:

• deposits and withdrawals;

• loan disbursements and repayments;

• security transactions;

• payment-system settlements;

• government transactions;

• foreign-exchange settlements; and

• other cash inflows and outflows.

Treasury therefore needs mechanisms through which short-term liquidity can be borrowed or deployed efficiently.

Call, Notice, and Term Money provide such mechanisms for eligible participants.

The Most Important Feature: These Are Unsecured Funds

Call Money, Notice Money, and Term Money transactions covered by the RBI framework involve unsecured borrowing and lending.

This means that the borrowing is not backed by specific securities provided as collateral.

This distinction is highly important for CAIIB.

Because the exposure is unsecured, participants must consider the creditworthiness and exposure to the counterparty in addition to liquidity requirements.

Call Money

RBI defines Call Money as borrowing or lending in unsecured funds on an overnight basis.

In simple terms:

Borrow today → repay on the next applicable day.

It represents the shortest maturity among the three products.

Why Is Call Money Used?

Call Money is mainly useful for very short-term liquidity adjustment.

A bank may experience a temporary shortage because:

• customer withdrawals are higher than expected;

• loan disbursements exceed incoming funds;

• settlement payments must be made;

• expected receipts are delayed; or

• an end-of-day liquidity mismatch arises.

Another eligible institution may simultaneously have excess funds.

The Call Money market allows the surplus funds of one participant to meet the overnight requirement of another.

Treasury Example

Bank A expects ₹500 crore of incoming funds tomorrow but faces a ₹200 crore liquidity shortage today.

Bank B has temporary surplus liquidity.

Bank A may borrow ₹200 crore overnight from Bank B through the Call Money market, subject to applicable limits and market conditions.

The funds are required only for the overnight period.

Therefore, Call Money, rather than longer-tenor borrowing, may fit the requirement.

Notice Money

RBI defines Notice Money as borrowing or lending in unsecured funds for tenors up to and inclusive of 14 days, excluding overnight borrowing or lending.

For examination understanding, this means:

more than overnight and up to 14 days.

Traditionally, it is commonly described as funds for 2 to 14 days.

Why Is Notice Money Used?

Suppose a bank knows that its liquidity shortage will continue for one week.

An overnight borrowing would have to be renewed repeatedly, exposing the bank to uncertainty about:

• availability of funds;

• future overnight rates; and

• refinancing.

A Notice Money transaction can match the expected liquidity requirement more closely.

Practical Example

A treasury expects a major inflow after seven days but requires ₹300 crore until then.

Instead of borrowing overnight every day, it may enter into a seven-day unsecured borrowing, subject to applicable regulations and market conditions.

This would fall under Notice Money.

Term Money

RBI defines Term Money as borrowing or lending in unsecured funds for periods exceeding 14 days and up to one year.

Therefore:

Above 14 days → Up to 1 year = Term Money

Why Is Term Money Used?

Term Money is useful when the funding need is longer than the Notice Money period.

It can help treasury:

• manage longer short-term liquidity mismatches;

• obtain more stable short-term funding;

• reduce frequent rollover requirements;

• match expected cash-flow gaps; and

• manage the maturity profile of short-term funds.

Practical Example

A bank expects a temporary funding shortage for three months because certain assets will mature only after that period.

Eligible treasury participants may consider Term Money funding for the required period, subject to applicable limits and market conditions.

Call vs Notice vs Term Money

Eligible Participants

Under the RBI's presently operative Call, Notice and Term Money framework, eligible participants include:

• Scheduled Commercial Banks, excluding Local Area Banks;

• Payment Banks;

• Small Finance Banks;

• Regional Rural Banks;

• State Co-operative Banks;

• District Central Co-operative Banks;

• Urban Co-operative Banks; and

• Primary Dealers.

These entities may participate as borrowers and lenders subject to the applicable prudential and internal limits.

Why Are These Markets Important to Bank Treasury?

1. Daily Liquidity Adjustment

Call Money allows treasury to handle very short-lived liquidity shortages and surpluses.

This is particularly useful because a bank's cash position can change significantly from one day to another.

2. Deployment of Temporary Surplus

A bank with surplus funds may lend to an eligible counterparty rather than leave the funds idle, subject to internal and regulatory requirements.

3. Funding Temporary Gaps

Notice and Term Money allow a bank to align borrowing more closely with the expected duration of a liquidity mismatch.

4. Reducing Maturity Mismatch

If treasury knows how long funds will be required, selecting an appropriate tenor can reduce unnecessary refinancing.

5. Supporting Overall Liquidity Management

These products form part of the treasury's broader liquidity toolkit.

They are not substitutes for proper liquidity planning. Rather, they help treasury manage temporary mismatches within the bank's approved liquidity framework.

Interest Rates

Under the RBI's operative Directions, eligible participants are free to decide the interest rates applicable to Call, Notice, and Term Money transactions.

Rates therefore respond to market conditions.

Important influences may include:

• demand for short-term funds;

• availability of liquidity;

• monetary conditions;

• expected interest rates;

• tenor;

• counterparty considerations; and

• overall financial-market conditions.

Call Rate as a Liquidity Signal

Because Call Money represents overnight unsecured funds, changes in overnight rates can provide useful information about short-term liquidity conditions.

When funds become scarce, overnight rates may experience upward pressure.

When liquidity is abundant, rates may soften.

However, the actual market rate at any time depends on prevailing market conditions.

Tenor and Interest-Rate Risk

The maturity selected affects the borrower's funding certainty.

Consider a treasury that requires funds for 30 days.

Strategy A: Borrow Overnight Repeatedly

The bank may borrow in Call Money and roll the borrowing every day.

The problem is that:

• tomorrow's rate is uncertain;

• funds may become more expensive;

• liquidity conditions may tighten; and

• refinancing is repeatedly required.

Strategy B: Borrow for an Appropriate Longer Tenor

A longer-tenor transaction may provide greater funding certainty for the required period.

However, the agreed rate may differ from the overnight rate.

Therefore, treasury must balance:

cost versus funding certainty.

Trading Venue

Call, Notice and Term Money transactions may be executed in the OTC market, including through:

• NDS-CALL; or

• another Electronic Trading Platform authorised by RBI for the purpose.

NDS-CALL is the electronic platform used for execution and reporting of transactions in these markets.

This is an important examination point:

NDS-CALL is associated with Call, Notice and Term Money transactions.

Reporting Requirements

Under the currently operative RBI Directions, transactions executed outside the NDS-CALL platform must generally be reported on the NDS-CALL platform within 15 minutes of execution by the relevant parties or platform, as applicable.

Transactions executed directly on NDS-CALL do not require separate reporting.

For CAIIB, understand the principle:

OTC execution does not mean absence of regulatory reporting.

Prudential Limits

Participation in the Call, Notice and Term Money markets is not unlimited.

RBI prescribes a framework of prudential limits, while participants may also set internal Board-approved limits.

For example, under the presently operative framework:

• Scheduled Commercial Banks operate within internal Board-approved limits and applicable regulatory limits for inter-bank liabilities;

• Small Finance Banks have specified limits for Call and Notice Money and Board-approved limits within the applicable inter-bank framework for Term Money;

• Payment Banks and Regional Rural Banks are subject to specified capital-based limits;

• Co-operative Banks have prescribed limits linked to aggregate deposits; and

• Primary Dealers have limits linked to Net Owned Fund.

The exact limits should always be checked from the prevailing RBI Direction because regulatory requirements can change.

For CAIIB, the conceptual lesson is more important:

Access to the market does not mean unlimited borrowing or lending.

Current Regulatory Position

The operative framework identified by RBI is the Master Direction – Reserve Bank of India (Call, Notice and Term Money Markets) Directions, 2021, effective from 5 April 2021 and shown by RBI as updated through 8 June 2023.

RBI also released a draft Master Direction for Call, Notice and Term Money Markets in 2026. As of September 2026, RBI's website identifies it as a draft, so a draft proposal should not be confused with the presently applicable Direction.

Secured vs Unsecured Short-Term Borrowing

One of the easiest ways to understand these products is to compare them with secured money-market funding.

Call, Notice and Term Money

Funds are lent without specific collateral.

Therefore, counterparty exposure is important.

Repo-Type Borrowing

Funds are obtained against eligible securities under the relevant repo framework.

Therefore, collateral forms an essential part of the transaction.

Do not confuse overnight tenor with Call Money automatically.

An overnight secured repo is not Call Money merely because it is for one night.

The presence or absence of collateral is crucial.

Practical Banking Application

Assume a bank's treasury forecasts three separate liquidity gaps.

Situation 1: ₹200 Crore Needed Until Tomorrow

The shortage will disappear when expected funds arrive the next day.

Appropriate category:

Call Money

Reason: the requirement is overnight.

Situation 2: ₹300 Crore Needed for 10 Days

A large inflow is expected after ten days.

Appropriate category:

Notice Money

Reason: the tenor is more than overnight but does not exceed 14 days.

Situation 3: ₹500 Crore Needed for 60 Days

The bank expects funds from maturing assets after two months.

Appropriate category:

Term Money

Reason: the borrowing exceeds 14 days but remains within one year.

The key examination method is simple:

Identify the tenor first.

Treasury Perspective: Borrower and Lender

The same bank treasury may be a borrower on one day and a lender on another.

When Treasury Borrows

It may need funds because:

• withdrawals exceed inflows;

• settlements create a temporary deficit;

• loan disbursements are high;

• expected receipts are delayed; or

• liquidity is required for another permitted purpose.

When Treasury Lends

It may have temporary surplus funds after meeting its own:

• operational requirements;

• regulatory requirements;

• expected payments; and

• liquidity buffers.

Treasury may then deploy eligible surplus funds within approved limits.

Therefore, Call, Notice and Term Money markets help redistribute short-term liquidity among eligible participants.

Liquidity Risk in Repeated Overnight Borrowing

Call Money is highly useful, but excessive dependence on overnight borrowing can create risk.

Suppose a bank has a 90-day funding need but finances it entirely through overnight Call Money.

Every day, it must obtain fresh funding.

If market liquidity suddenly tightens:

• borrowing may become expensive;

• counterparties may reduce lending;

• refinancing uncertainty may increase.

This creates rollover or refinancing risk.

Therefore, treasury should match the funding tenor with the expected liquidity requirement as far as appropriate within its overall liquidity framework.

Relationship with Monetary and Market Conditions

Call Money rates can react quickly to changes in short-term liquidity.

For example:

Tighter liquidity → greater demand for overnight funds → possible upward pressure on rates

and

Surplus liquidity → greater availability of funds → possible downward pressure on rates

The relationship is not mechanical, because rates are also affected by:

• expectations;

• RBI liquidity operations;

• counterparty conditions;

• market sentiment; and

• other financial-market factors.

For CAIIB, understand Call Money as an important part of the overnight unsecured money market.

CAIIB Exam Focus

Call Money means overnight unsecured funds.

This is the most important definition.

Notice Money excludes overnight funds.

It covers periods above overnight and up to and including 14 days.

Term Money starts only after 14 days.

It covers periods exceeding 14 days and up to one year.

All three are unsecured.

Do not confuse them with secured repo transactions.

Tenor is the main distinction among Call, Notice and Term Money.

Eligible participants can act as borrowers and lenders, subject to applicable RBI requirements and limits.

Interest rates are market-determined between eligible participants under the RBI framework.

NDS-CALL is an important trading and reporting platform.

OTC deals are still subject to reporting requirements.

Market access is subject to prudential and internal limits.

Longer liquidity requirements should not automatically be funded by repeatedly rolling overnight Call Money. Repeated refinancing can create liquidity risk.

Common Exam Traps

Trap 1: Call Money Means Funds for Up to 14 Days

Incorrect.

Call Money is overnight only.

Trap 2: Notice Money Includes Overnight Borrowing

Incorrect.

RBI specifically excludes overnight borrowing from Notice Money.

Trap 3: A 14-Day Transaction Is Term Money

Incorrect.

A transaction of up to and including 14 days falls within Notice Money.

Term Money starts when the period exceeds 14 days.

Trap 4: A 15-Day Unsecured Transaction Is Notice Money

Incorrect.

A 15-day transaction exceeds the 14-day Notice Money limit and therefore falls under Term Money.

Trap 5: Term Money Can Have Any Long-Term Maturity

Incorrect.

Under the RBI definition, Term Money extends only up to one year.

Trap 6: Call Money Is Secured by Government Securities

Incorrect.

Call Money is unsecured.

Borrowing against securities under a repo arrangement is a different product.

Trap 7: Every Overnight Borrowing Is Call Money

Incorrect.

Tenor alone is not sufficient.

An overnight secured transaction such as a repo is not Call Money.

Trap 8: Only Banks Can Participate

This can be misleading.

The RBI's operative framework permits specified categories of banks as well as Primary Dealers, subject to eligibility and prudential requirements.

Trap 9: Eligible Participants Can Borrow Without Limits

Incorrect.

RBI prudential requirements and Board-approved internal limits apply.

Trap 10: An OTC Transaction Does Not Need Reporting

Incorrect.

Applicable OTC Call, Notice and Term Money transactions are subject to RBI-prescribed reporting requirements.

Memory Technique

Remember the sequence:

C → N → T = 1 → 14 → 365

• C – Call: Overnight

• N – Notice: Above overnight to 14 days

• T – Term: Above 14 days to 1 year

Also remember:

C-N-T = No Collateral

All three represent unsecured funds under the RBI framework.