This article throws light upon the top five institutions of money market. The institutions are: 1. Commercial Bank 2. Central Bank 3. Acceptance Houses 4. Non-banking Financial Intermediaries 5. Bill Brokers.
Institution # 1. Commercial Bank:
Commercial banks are the back bone of the money market. They form one of the major constituents of the money market. These banks use their short term deposits for financing trade and commerce for short periods.
The commercial banks invest their funds in the discounting of bills of exchange, i.e. both exchange bills or commercial bills and treasury bills or government bills to facilitate trade and commerce by mobilising the flow of money.
The commercial banks lend against promissory notes and through advances and overdrafts. The call money loans are also provided by these banks to the bill brokers and dealers in the stock exchange market. The commercial banks put their excess reserves in different forms or channels of investments which satisfy their conflicting principles of liquidity and profitability.
The aim is that the funds invested not only remain liquid in from but also earn high interest or yield income on them. A noteworthy point is that in addition to commercial banks there are cooperative banks, savings banks, financial companies, etc. also which form part of the money market.
Institution # 2. Central Bank:
The central bank plays a vital role in the money market. It is the monetary authority and is regarded as an apex institution. No money market can exist without the central bank. The central bank is the lender of the last resort and controller and guardian of the money market.
The member banks may approach the central bank for loans and advances during emergency. It controls and guides the institutions working in the money market.
It raises or reduces the money supply and credit to ensure economic stability in the economy. In other words, it helps in averting the possibilities of inflation and deflation. A pertinent point is that the performance of the central bank depends on the character and composition of the money market.
But the central bank does not enter into direct transactions; it controls the money market through changes in the bank rate and open market operations.
Institution # 3. Acceptance Houses:
The acceptance houses and bills brokers are the main institutions dealing in the bill market. The institution of acceptance houses developed in England where merchant bankers transferred their headquarters to London Money Market in the late 19th and the early 20th century.
They function as intermediaries between importers and exporters, and between lenders and borrowers in the short period. In the London Money Market the acceptance houses performed a very useful role as merchant bankers. These houses specialised in the acceptance of trade bills/commercial bills.
They accepted those bills which were drawn on merchants whose financial standing was not known in order to make the bills negotiable in the London Money Market. In this way, they handled the international transactions without any problem a noteworthy point is that by accepting a trade bill, they guaranteed the payment of the bill on maturity. For this guarantee, these houses charged a commission.
The discounting of such accepted bills was done by another specialised agency known as ‘discount houses’. This institution was an important segment of the London Money Market in the past but now its importance has declined because the commercial banks have undertaken the business of acceptance houses.
Institution # 4. Non-banking Financial Intermediaries:
In addition to commercial banks, there are non-banking financial intermediaries who resort to lending and borrowings of short term funds in the money market. In non- banking financial intermediaries we include savings banks, investment houses, insurance companies, building societies, provident funds and other business corporations like chit funds.
Institution # 5. Bill Brokers:
In the developed money market like the London Money Market and the New York Money Market, private companies act as discount houses. The main function of these companies is to discount bills on behalf of others.
Besides these companies, there are bill-brokers who work as intermediaries between the borrowers and lenders by discounting bills of exchange at a small commission. In an under-developed money market, bill brokers are quite important intermediaries.