Everything You Need to Know About Cash Management Bills

Introduction

When it comes to India’s financial mechanisms, one instrument takes center stage for its crucial role in managing short-term cash dynamics—the Cash Management Bill (CMB). Exclusively issued by the central government, the CMB plays a pivotal role in addressing temporary cash flow imbalances. This exploration delves into the subtleties of cash management bills, unveiling their historical evolution and the instrumental role they play in orchestrating the financial harmony of India. Join us to know about the cash management bills as they emerge as a key element in the composition of economic resilience and liquidity management.

Cash Management Bills Definition

Cash management bills are short-term debt instruments issued by the government, typically the central government, to address temporary cash flow imbalances. These bills play a vital role in the money market, providing the government with a means to manage its short-term liquidity needs effectively.

How Cash Management Bills Work

• Issuance: Cash Management Bills (CMBs) are short-term instruments issued by the central government to manage temporary liquidity shortages.
• Purpose: CMBs address immediate cash needs, bridging gaps until regular revenue or other financing arrangements are in place.
• Auction Process: The Reserve Bank of India (RBI) conducts auctions, where CMBs are sold to the highest bidders, often banks and financial institutions.
• Pricing: CMBs are issued at a discount to face value; investors receive the full face value at maturity, earning the difference as interest.
• Maturity: These bills typically have maturities of less than 90 days, making them ideal for very short-term investments.
• Investors: Primary buyers include banks, which use CMBs to manage liquidity and comply with statutory liquidity requirements, and mutual funds looking for short-term, low-risk investments.

Features of Cash Management Bills

Cash Management Bills, akin to treasury bills, are short-term debt instruments exclusively issued by the central government.

They play a crucial role in managing short-term cash flow imbalances, with a tenor of up to 90 days, reflecting the maturity range of treasury bills (91 days, 182 days and 364 days) but on a shorter scale.

Unlike traditional interest-bearing instruments, CMBs are zero coupon securities, meaning they are issued at a discount and redeemed at face value upon maturity.

For instance, a CMB with a face value of Rs 100 will be issued at Rs 98, and upon maturity, the investor will receive Rs 100. This results in an effective profit of Rs 2 through the discount.

Issuance and Auction Mechanism

The Reserve Bank of India (RBI) conducts auctions to sell cash management bills to market participants, including banks, primary dealers, and institutional investors. The auction process follows a multiple price auction mechanism, where bids start at higher prices and progressively decrease. The cut-off yield is predetermined, and successful bidders acquire CMBs at or above this cut-off price. The minimum investment order value is ₹10,000, with multiples of ₹10,000 thereafter. The settlement of CMBs occurs on a T+1 basis.

Historical Perspective

The introduction of cash management bills dates back to August 2009, when the Government of India, in collaboration with the RBI, decided to incorporate this instrument into its financial toolkit. The inaugural issuance occurred on May 12, 2010. Since then, CMBs have been issued as required, featuring maturities ranging from 7 days to 84 days. Another comparable method for the government to secure short-term funds is by utilizing Ways and Means Advances (WMA) provided by the RBI. Under WMA, the RBI offers temporary loan facilities to the government for up to 90 days. During challenging economic periods, such as the COVID-19 lockdown in May 2020, the government sought support from cash management bills. An issuance of ₹80,000 crores with a tenure of 84 days was executed to alleviate cash flow stress, and the encouraging news is that the issue was oversubscribed by 4.3 times! This exemplifies the flexibility and adaptability of CMBs as a tool for managing short-term financial exigencies.

Investor Landscape

Banks are drawn to CMBs as these bills qualify as eligible securities for maintaining the Statutory Liquidity Ratio, as mandated by the Banking Regulation Act, 1949. Simultaneously, mutual funds, in search of a secure and liquid avenue to park funds from liquid schemes, also perceive CMBs as a viable option. Cash management bills provide an array of benefits for the government, central bank, and investors. The interest costs are lower compared to other forms of borrowings, such as T-Bills and Ways & Means Advances. They assist the government in effectively managing short-term cash balances, while investors enjoy the benefits of a low-risk and highly liquid instrument.

Conclusion

In the intricate dance of India’s financial markets, cash management bills play a nuanced role in ensuring liquidity and addressing temporary cash flow mismatches. The saga of their issuance, auction mechanisms, and historical significance showcases the adaptability of these instruments in navigating economic uncertainties. As we bid adieu to this exploration, it’s evident that cash management bills are not just financial instruments; they are integral players in the symphony of India’s economic resilience.

FAQs

Q. What is the cash management bill?

A. A Cash Management Bill (CMB) is a short-term debt instrument used by the central government to manage immediate liquidity needs efficiently.

Q. What is the difference between a cash management bill and a Treasury bill?

A. The key difference lies in their duration and purpose: CMBs are very short-term with maturities up to 90 days, aimed at managing immediate liquidity requirements, whereas Treasury bills have longer durations (91 to 364 days) and serve broader fiscal financing needs.

Q. What are the cash management bills of RBI?

A. The RBI issues CMBs on behalf of the central government to manage short-term liquidity conditions effectively, providing a financial tool to balance cash flow imbalances.

Q. What is the difference between cash management bills and ways and means advances?

A. Cash management bills are marketable debt instruments used to raise funds for short-term requirements, while Ways and Means Advances (WMA) are non-marketable, short-term loans extended by the RBI to the government to cover mismatches in the treasury’s cash flows.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.