Organized Market, Unorganized Market

The organised sector of the money market con­sists of the Reserve Bank of India, commercial banks, companies lending money, financial inter­mediaries such as the Life Insurance, Credit and Investments Corporation of India, Unit Trust of India, Land Mortgage Banks, Cooperative Banks, Insurance Companies etc. and call loan brokers, and stock brokers.

The unorganised sector of the money market is largely made up of indigenous bankers, money lenders, traders, commission agents etc., some of whom combine money lending with trade and other activities.

Generally speaking, these two sec­tors of the Indian money market — those institu­tions which come directly or indirectly under the broad regulations of the Reserve Bank constitute the organised sector, while the others which fall completely outside the purview of the central bank­ing regulations, make up the unorganised sector.

The organised sector is mainly composed of the commercial banks, cooperative banks and dis­count houses, acceptance houses and land mort­gage banks. The unorganised sector is largely outside the control of the Central Bank and is characterised by lack of uniformity in their business dealings. In India, the indigenous bankers and money lend­ers, traders, are important segment of unorgan­ised money market.

Features of the Indian money market:

First, a major characteristic of the Indian money market is that the seasonality of demand for credit broadly follows the course of the agricultural sea­sons. The implication is that during the busy sea­son the commercial banks have to borrow from the RBI, while the level of such borrowings declines during the slack season. This provides a very use­ful lever to the RBI in controlling the volume of credit.

Secondly, Indian money market consists of organised and unorganised sectors. As already pointed out, the organised sector is composed of the RBI, Commercial banks, Co-operative banks, Land mortgage banks. Considering the continen­tal character of the country, the banking develop­ment is most inadequate for the needs of trade and industry largely because of the hoarding habit of the people.

Thirdly, with a view to strengthening the or­ganised money market in India, new institutions have been established and consolidated to either lend on long-term basis or regulate credit in a pre­scribed manner. The new institutions which have come up after independence are IFC (1948), NIDC (1954), ICIC (1955), SFC (1951), NSIC (1955), UTI (1964) and the IDBI (1964).

Fourthly, the Indian money market is domi­nated by the unorganised sector. The only link that exists between the organised and unorganised sec­tors is through commercial banks. Indigenous bank­ers carry on their activities through the media of these commercial banks.

In rural areas, they do so through cooperative credit societies. However, a number of credit socie­ties are under the control of money lenders. It seems that a growing number of spurious cooperative so­cieties have been organised solely to enable these money lenders to take advantage of the concessions they offer.

Fifthly, unorganised market has of late been strengthened with the addition of unaccounted or black money. A conservative estimate places this amount at between Rs. 2,500 and Rs. 10,000 crores. As a result of the income velocity of money, con­siderable savings will be accruing in the unaccounted income sector. These sectors seek out­lets which again escape from the tax net and thus enlarge the un-accounted sector. Unaccounted money is used in smuggling of goods, drugs, and precious metals and in real estates. These high re­turn activities are invariably financed by the black money.

The impact of unaccounted money on the money market is very significant. With its growth in the country a number of mushroom indigenous bankers have sprang up, who are quite different from the traditional bankers and it reported that they lend money at very high rate of interest.

The indigenous money market has itself become a law­less market. The unaccounted money as part of the unorganised money market is invested in property, smuggling, trade and real estate. This fact has fur­ther limited the effectiveness of monetary policy.

Sixthly, there is no direct link between the un­organised and organised money markets. It is es­sential to establish a link between the two markets.

The above figure shows the unorganised money market with the growth of unaccounted money.

Seventhly, the bill market system is yet to de­velop fully. The bill market is one of the important sub-markets of the money market. The bill market or discount market refers to the market where short dated bills are bought and sold. The treasury bills are the most important instrument used in the bill market. The Bill Market scheme was introduced in 1952 and in 1970 but is only partially successful.

Lastly, a well-developed money market will have close links with the leading money markets of the world and will be sensitive to the develop­ments in these foreign markets. But the Indian money market is an insular one with little contract with foreign markets.

Partly due to the exchange control restrictions on capital movements there is no movement of funds between the Indian money market and the foreign market. The Indian money market does not attract any foreign funds.

Money market is the place or mechanism where short-term instruments that mature within a year are traded. Money market meets the work­ing capital requirements of industry, trade and commerce. Long-term requirements of industries are not met by money market instruments.

The cen­tral bank occupies a pivotal position in money market. It is regarded as ‘presiding deity’ of money markets. Its function is not only that of a watch dog of the monetary system but also of a promo­tional and development banker.

On the other hand, capital market is a market in which lenders or investors provide long-term funds in exchange for financial assets offered by borrowers and holders. The primary purpose of capital market is to direct the flow of savings into the long-term investments. The distinction between the money market and capital market is based on the difference in the period of the financial assets.

Though the terms money market and capital market are used interchangeably, they differ in a number of ways. Money market primarily exists as a means of liquidity adjustment. But a capital market’s main function is to serve as a link between long-term in­vestors and long-term borrowers.

Secondly, money market and capital market instruments also differ in terms of risk. Money market instruments generally carry low credit risk and low market risk. Capital market instruments include bonds, debentures, equity shares and pref­erence shares.

Thirdly, money market is dominated by one set of financial institutions commercial banks and the central bank. But in the capital market, no sin­gle institution dominates the market.

However, there is no fundamental difference between capital market and money market regard­ing transferring of resources. There is no close nexus in money and capital markets.

Commercial banks are active in money mar­ket while non-banking financial institutions and public financial institutions are active in capital market. There is a considerable degree of overlap in the function of different financial institutions.

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