UPSC Prelims 2024 Q40: CBLO (Collateralised Borrowing) — Explained
With reference to the Indian economy, "Collateral Borrowing and Lending Obligations" are the instruments of:
- Bond market
- Forex market
- Money market
- Stock market
Answer: (c) Money market
Statement-wise explanation
- a: incorrect — The bond market is where long-term debt securities such as government securities and corporate bonds are issued and traded. A CBLO was not a bond. It was a short-term borrowing and lending deal in which government securities were only the collateral. Trading in the bonds themselves is a separate market.
- b: incorrect — The forex market deals in foreign currencies, such as rupee–dollar trades. CBLO deals were rupee borrowing and lending between domestic institutions, settled through the Clearing Corporation of India Ltd (CCIL). No foreign currency was exchanged.
- c: correct — CCIL launched CBLO on 20 January 2003 and described it as a 'new Money Market Instrument'. The RBI also lists CBLO among money market instruments, alongside call money, repo, T-bills, commercial paper and certificates of deposit. It let institutions borrow and lend funds for short periods against government securities. On 5 November 2018 the CBLO segment was discontinued and replaced by tri-party repo (TREPS).
- d: incorrect — The stock market trades equity shares of companies and is regulated by SEBI. A CBLO gave no ownership in any company. It was a collateralised short-term loan, and its market came under the RBI's oversight.
How to eliminate
Three words in the name give the answer away. 'Borrowing and Lending' means it is a market for lending funds, which rules out the stock market (ownership) and the forex market (currencies). 'Collateral' tells you the loan is backed by securities, as in a repo. 'Obligation' means a promise to repay. The real choice is between the bond market and the money market. The trap is that the collateral was government bonds. But the instrument was the short-term loan, not the bond. Short-term collateralised borrowing between banks and institutions, like repo, belongs to the money market. Fact to remember: CBLO was a money market instrument launched by CCIL in 2003 and replaced by tri-party repo (TREPS) in November 2018.
Know more
Money market vs capital market
The money market is where banks, companies, mutual funds and the government borrow and lend for up to one year. The capital market (stocks and long-term bonds) raises funds for longer periods. The RBI regulates most money market instruments.
CBLO in brief
- Launched by CCIL on 20 January 2003. It was a product unique to India and worked much like a tri-party repo.
- A borrower put up government securities as collateral and borrowed funds against them. CCIL stood in the middle as the central counterparty, so neither side carried credit risk on the other.
- Members who were not on the RBI's NDS system (such as mutual funds and other institutions) could take part from 2004. CBLO became a key overnight market for them because they cannot borrow in the call money market.
- Banks counted CBLO borrowing in their net demand and time liabilities (NDTL), so CRR applied to it.
- Replaced by tri-party repo (TREPS) from 5 November 2018.
Main money market instruments
| Instrument | Issuer / players | Tenor | Secured? |
|---|---|---|---|
| Call / notice / term money | Banks, primary dealers | Overnight (call); 2–14 days (notice); 15 days–1 year (term) | No |
| Treasury bills | RBI issues them for the Government of India | 91, 182, 364 days | Sovereign |
| Cash Management Bills | Government of India | Under 91 days | Sovereign |
| Commercial Paper | Companies, NBFCs | 7 days–1 year | No |
| Certificate of Deposit | Banks | 7 days–1 year | No |
| Market repo / TREPS (earlier CBLO) | Banks, MFs, PDs, others | Mostly overnight | Yes, G-secs |
The key contrast: call money is unsecured and limited to banks and primary dealers. CBLO, and now TREPS, is collateralised and open to more types of participant.
NCERT Concepts to Revise
- Money market: The question asks which market CBLO belonged to; this entry defines the market by its one-year horizon and its participants.
- Tri-party repo: Tri-party repo is the collateralised borrowing system that took over from CBLO in 2018, so it explains how CBLO worked.
- Call money market: Call money is short-term interbank lending without collateral; comparing it shows what 'collateralised' in CBLO means.