Discount Market

Discount Market

The part of the money market consisting of banks,

discount houses, and brokers.
A trading market in which notes, bills, and other
negotiable instruments are discounted.
A market for borrowing and lending money, through
certificates of deposit, Treasury bills, etc.
 Discount market refers to the market where short-term
genuine trade bills are discounted by financial
intermediaries like commercial banks.
When credit sales are effected, the seller draws a bill on
the buyer who accepts it promising to pay the specified
sum at the specified period. The seller has to wait until
the maturity of the bill for getting payment.
The presence of this market enables him to get
payment immediately. The seller can ensure payment
immediately by discounting the bill with some financial
intermediary by paying a small amount of money called
Discount rate on the date of maturity, the
intermediary claims the amount of the bill from the
person who has accepted the bill.
Objectives of Discount market
Smoothening liquidity
Market maker
Promoting market
To help banks in emergencies or for meeting liquidity or
financial crises
To supply funds to bank for temporary needs or short
term adjustments in day-to-day course of events
 In many countries, banks of various sizes, specialized
dealers in bonds, bills and papers & financial institutions
discounts, rediscounts, refinance money market
instruments and smoothen liquidity flow in primary and
secondary market.
In India, institutions such as IDBI, NABARD, DFHI and
STCI play an important role in discount market.
In U.K. a unique, specialized, institutional set-up,
namely the Discount Houses exists to perform these
tasks.
Discount Houses in the U.K.
They smooth irregularities in the movement of funds in
money and credit markets, simplifying the functioning
of banks
Discount houses are strictly commercial concerns
organized in the form of public companies which are
owned and operated independently, unconnected with
other financial institutions
They are engaged in business of lending and borrowing
which is predominately secured.
They operate as principals, dealers, jobbers, brokers
 They deal in foreign bills of exchange, treasury bills, gilt edged
securities of maturity of less than 5 yrs, call money, negotiable
certificates of deposits etc.
They lend to both public and private sector.
Their source of funds primarily comes from London Clearing banks as
well as Banks of England, Scottish banks etc.
Bank of England channels the cash required for cash reserves of the
clearing banks and also determines which assets of the discount house
will be eligible for rediscount.
Discount Houses earn their profits mainly by borrowing money more
cheaply than they lend it. To a certain extent their profits are also
derived from the commission which they earn through various
activities.
Since they deal in markets where rates of interest are very volatile.
Their earnings are extremely variable from year to year.
 DISCOUNT AND FINANCE HOUSES
OF INDIA
The chore committee first introduced the idea of DFHI
by to review the system of cash credit in 1979.
Following functions were proposed :
Sole depository of the surplus liquid funds of the
banking system as well as NBFIs.
Should create ready market for commercial bills,
treasury bills and government securities by purchasing
and selling for the banking system.
 DFHI Ltd. was set up by the RBI on April 25,1998 with
the objective of deepening and activating the money
market.
Jointly owned by the RBI, public sector banks and all
India Financial Institutions.
Facilitates smoothening of short term liquidity
imbalances by developing active primary ad secondary
markets.
It has made treasury bills a highly liquid instrument in
the secondary market.
 DFHI has undergone a transformation over the years.
It has tried to bring into fold the active monetary
systems all types of banks, financial institutions and
non-bank public and private sectors so that their short
term surpluses and balances are equilibrated at market
related rates.
 SECURITIES TRADING
COORPORATION OF INDIA
Set up in 1994 by RBI with the objective of promoting
good secondary markets for debt instruments.
Presently STCI Finance Ltd is classified as a loan NBFC.
As the leading Primary Dealer in the country, the
Company was a market maker in government securities,
corporate bonds and money market instruments apart
from carrying out proprietary trading in equity.
 Incorporated under the Companies Act, 1956 with an
authorised and paid up capital of Rs. 500 crore of which
RBI contributed 50.18 per cent.
Under writing and Market-making and Trading in GOI
Securities and Treasury Bills.
Lately STCI has diversified its activities in trading in PSU
Bonds and other Corporate Debt Instruments
Participation in Repo Market of GOI Securities and
Treasury Bills
 BASIC SIMILARITIES AND
DIFFERENCES BETWEEN DFHI AND
SIMILARITIES
STCI
Both of them are companies incorporated under the Companies Act
Both operate in the primary, secondary and repos market for dated
securities, treasury bills and call money
Both of them are accredited primary dealers (PDs).
DIFFERENCES
DFHI was setup with TB as its main portfolio while STCI was setup to
concentrate on long dated government securities. They are expected
to operate in each others areas as an ancillary activity. STCI is said to
target retail markets by dealing with corporates while DFHI is a
wholesale dealer.