Introduction
Call money is also referred to as the money at call. It is a short-term loan which is due to be paid immediately in full as and when demanded by the lender. Not similar to a term loan, call money loan does not have a defined schedule of payment and maturity. Furthermore, the lender of the call money need not provide prior notice to the borrower about the repayment.
Breaking Down Call Money
Call money is a short-term loan which comes with interest. The tenure of call money loan ranges from one day to fourteen days after the disbursement of the amount is made by the lending institution. As these loans are not of long-term, there are no defined timelines to repay interest and principal. The rate of interest at which the call money is lent is called the call loan rate.
Importance of Call Money
Broking firms utilise call money as a means to fund and maintain margin accounts with the view of benefitting their customers wishing leverage investments. The call money funds can move swiftly among broking firms and lenders. Hence, the call money funds are one of the most liquid assets appearing in the balance sheet of brokerage companies.
If the bank which has lent the money calls the funds, then the broking firm may go onto issue margin calls. Once this is done, it will result in the selling of securities held by the client in his or her account automatically. This will facilitate the repayment of the money to the bank by the broking firm. Margin rates charged by the brokerage company varies across the banks and brokerage firms.
Call money is one of the essential components of the money market. It has various extraordinary features. Call money provides a means to raise funds over a very short period. Also, it helps in managing the balance sheet efficiently.
