Role of Discount and Finance House of India (DFHI)!
Pursuant to the Vaghul Working Group recommendation for setting up an institution to provide enhanced liquidity to the money market instruments, the RBI set up the Discount and Finance House of India (DFHI) jointly with public sector banks and the all-India financial institutions.
DFHI was incorporated in March 1988 and it commenced operation in April 1988. The main objective of this money market institution is to facilitate smoothening of the short-term liquidity imbalances by developing an active secondary market for the money market instruments. Its authorized capital is Rs. 250 crores.
DFHI participates in transactions in all the market segments, it borrows and lends in the call, notice and term money market, purchases and sells treasury bills sold at auctions, commercial bills, CDs and CPs. DFHI quotes its daily bid (buying) and offer (selling) rates for money market instruments to develop an active secondary market for all these.
Treasury bills are not bought back by the RBI before maturity. Similarly, except at the fortnightly auctions these cannot be purchased from the RBI. DFHI fills this gap by buying and selling these bills in the secondary market. The presence of DFHI in the secondary market has facilitated corporate entities and other bodies to invest their short-term surpluses and to en cash them when necessary.
The RBI extends reliance limit to the DFHI against the collateral of treasury bills and against the holdings of bills of exchange with a view to imparting liquidity to various money market instruments.
The enhancement of such limits from time to time enabled the DFHI to provide higher and higher levels of liquidity in the period of stringency witnessed in the money market. In the aftermath of the irregularities in transactions in money and securities markets which emerged in 1992, there was a reduction in overall trading volumes in almost all segments of the money market.
The DFHI’s business turnover in certain segments viz. treasury bills and commercial bills continues to remain subdued even during 1993-94. The easy conditions prevailing in the call money market discouraged secondary market transactions in the treasury bills. Both the 91 days and 364 days treasury bills are becoming preferred instruments in the money market.
Following the steps taken by the RBI in the last year to ensure that recourse to bill finance takes place only in respect of genuine bills of exchange arising from movement of goods and within the credit limits of borrowers, the volume of bills available for discount/rediscount has reduced.