Money At Call And Short Notice

Published Apr 29, 2024

Definition of Money at Call and Short Notice

Money at call and short notice is a financial term that refers to funds lent by financial institutions that can be recalled (demanded back) by the lender at very short notice. Money at call is demandable immediately or within a very short period, typically 24 hours, whereas money at short notice requires a notice period before repayment, usually up to 14 days. This type of lending is usually prevalent in the interbank market where banks lend money to each other to manage liquidity and meet reserve requirements.

Example

Consider a scenario where Bank A has excess reserves and seeks to earn interest without locking in the funds for a long period. Bank B, on the other hand, needs additional liquidity to meet its reserve requirements temporarily. Bank A can lend money to Bank B with the agreement that the loan can be recalled either on demand (at call) or within a few days notice (short notice). This arrangement allows Bank A to earn interest on its excess reserves while providing Bank B with the necessary liquidity. If Bank A needs these funds back, it can call the loan if it’s “at call” or notify Bank B within the agreed-upon period if the funds are “at short notice.”

Why Money at Call and Short Notice Matters

Money at call and short notice plays a crucial role in the financial system’s liquidity management, enabling banks and financial institutions to meet their short-term funding needs without committing to long-term financing agreements. This flexibility helps stabilize the banking sector, especially in times of unexpected demand for cash or liquidity crunches. It allows banks to manage their day-to-day operations smoothly, ensuring they can meet withdrawal demands from depositors and adhere to regulatory requirements.

Frequently Asked Questions (FAQ)

What is the main difference between money at call and money at short notice?

The main difference lies in the notice period required for repayment. Money at call can be demanded back immediately or within a very short timeline, typically by the next day. In contrast, money at short notice requires a predetermined notice period before it must be repaid, which can range from a few days up to 14 days.

Who are the primary users of money at call and short notice?

The primary users are banks and other financial institutions. They utilize these funds for managing liquidity and ensuring they have enough cash on hand to meet immediate obligations. It’s an essential tool for short-term financial planning and liquidity management within the interbank market.

What are the risks associated with lending money at call and short notice?

While offering flexibility and liquidity benefits, lending money at call and short notice also carries certain risks. The primary risk is the uncertainty of funds being called back suddenly, which could challenge the borrowing institution’s liquidity management. Additionally, the interest rates for these loans can be volatile, reflecting the short-term nature of the agreement and prevailing market conditions.

How does money at call and short notice affect the overall economy?

Money at call and short notice contributes to the economy’s financial stability by ensuring that financial institutions can balance their liquidity needs efficiently. This fluidity enables banks to maintain operations, extend credit, and support economic activities without facing liquidity shortfalls. Moreover, it supports the Central Bank’s monetary policy by facilitating effective interbank lending, which can influence overall interest rates and liquidity in the banking system.

Can non-banking institutions access money at call and short notice?

While primarily a practice among banks and financial institutions, certain non-banking financial companies (NBFCs) and other corporate entities with high creditworthiness might also participate in similar arrangements. These transactions, however, are less common and usually involve higher scrutiny and specific agreements reflecting the increased risk due to the non-banking nature of the borrower.