Cash Management Bills (CMB) are short-term securities issued by a central bank in collaboration with a government to address temporary cash flow gaps. The instruments were introduced in India in 2010 by the Indian government in collaboration with the Reserve Bank of India (RBI).
CMBs are similar in character to Treasury bills or T-Bills but have a maturity period of less than 91 days in India.
This article explains what cash management bills are, their main features, and how they work.
Key Takeaways
- Cash management bills are issued in fungible and non-fungible forms. The maturity date of fungible CMBs coincides with an existing T-bill.
- CMBs are issued irregularly when there is a cash flow problem.
- The RBI announces an auction to sell CMBs, with competitive bidding.
- They can be purchased and sold on the secondary market.
- Seen as an eligible investment in government securities (G-Secs) by banks for the purpose of maintaining their Statutory Liquidity Ratio (SLR).
What are Cash Management Bills?
Cash management bills are short-term securities issued when a country needs an infusion of cash. The securities are issued by a nation's central bank, in consultation with the government, to address a temporary mismatch in cash balances. The bills function as a source of emergency funding or a measure to absorb excess liquidity.
The maturity tenure of these bills ranges from a few weeks to 91 days. Cash management bills allow a central bank to issue fewer long-term securities and have a lower cash balance.
The shorter maturity period of CMBs means that overall interest expense for the government is lower than for long-term securities.
They can be issued in fungible and non-fungible forms.
A cash management bill is fungible when its maturity date coincides with that of an existing T-bill issuance.
Non-fungible CMBs do not coincide with any T-bill issuance schedule. Participation by primary dealers is not compulsory, unlike fungible CMBs.
Cash Management Bills in India
The Government of India first issued CMBs to address a temporary cash-flow mismatch. The first set was issued in consultation with the RBI on May 12, 2010. The bills supplement short-term securities such as treasury bills.
Cash management bills are issued at a discount. They can be redeemed at face value on maturity.
Example:
If a CMB has a face value of ₹100, it can be acquired at ₹97.
When the security matures, it can be redeemed for ₹100.
There is no interest paid, but the discount is the return on investment.
The tenor, amount, and date of issue of the CMBs depend on the government’s temporary cash requirements. The settlement cycle is T+1 days.
Note: The RBI announces the auction date of CMBs via a press release on its website. Under Section 24 of the Banking Regulation Act, 1949, investment in bills is considered an eligible investment in G-Secs for Statutory Liquidity Ratio purposes.
Cash management bills serve two distinct purposes:
- Bridge temporary cash shortfalls: A government's receipts and payments do not always match. When a shortfall arises before scheduled revenue is deposited with the government, CMBs give the RBI a way to raise funds quickly without any commitment to a longer-term security.
- Absorbing excess liquidity: Cash management bills have also been used when liquidity is unusually high to withdraw surplus cash from the banking system. In November 2016, after the withdrawal of ₹500 and ₹1,000 notes, the RBI auctioned CMBs under the Market Stabilisation Scheme to mitigate the resulting surge in bank deposits.
Features of Cash Management Bills
The cash management bills introduced by the Reserve Bank of India aid in effective liquidity management. They are an additional instrument that market participants can use to invest surplus funds.
CMBs issued by the RBI have the following features:
- Auction participants: The cash management bills will be auctioned. Banks, primary dealers, and select financial institutions can take part in the auctions as authorised participants. The RBI will announce a day before the auction through a separate press release.
- Minimum value: A cash management bill usually has a minimum value of ₹10,000 or multiples thereof when trading in odd lots using the RBI’s Negotiated Dealing System-Order Matching (NDS-OM). Investors can bid for multiple units of security based on their liquidity requirements.
- Competitive bidding: CMBs are not covered under the non-competitive bidding scheme present for treasury bills. This means that the auction process involves competitive bidding. Participants submit bids specifying the yield and the amount they are willing to pay for CMBs.
- Acceptance of bids: The RBI accepts bids starting with the lowest yield. It moves progressively towards higher yields until the notified amount is reached. Successful bidders are allotted CMBs at the accepted yield through the RBI's Core Banking Solution (E-Kuber) system.
- Negligible risk: The bills are backed by the sovereign guarantee of the Indian Government. This makes them a virtually risk-free investment option.
- Nature: Investors can buy or sell CMBs in the secondary market before maturity. The securities qualify for the ready forward facility, in which an entity sells government securities with a formal commitment to repurchase them at a specified higher rate at a future date.
Difference Between Treasury Bills, Ways & Means Bills and Cash Management Bills
| Features | Treasury Bills (T-Bills) | Cash Management Bills (CMBs) | Ways and Means Advances/Bills |
| Primary purpose | To finance short-term funding needs and the regular fiscal deficit of the government | To cover temporary mismatches in government cash flow | To meet temporary mismatches in receipts and payments of the government |
| Issuing authority | Central bank on behalf of the government | Central bank on behalf of the government | Extended as a temporary loan to the government by the central bank |
| Maturity period | Fixed standard tenures such as 91 days, 182 days and 364 days | Less than 91 days generally | Very short-term duration, usually must be cleared within a few months under norms |
| Issuance frequency | Regular and predictable | Infrequent, issued only when cash flow need arises | Drawn on request or automatically when mismatches in cash flow arise within pre-agreed limits |
| Marketability | Fully tradable | Marketable | Cannot be traded on the secondary market |
| Yield | Issued at a discount and redeemed at face value | Issued at a discount and can be redeemed at face value, depending on market conditions | Same rate of interest as repo rates |
Can Retail Investors Access Cash Management Bills?
Institutional holders hold Cash Management Bills in a Subsidiary General Ledger (SGL) account with the RBI. Secondary market trades are settled via the NDS-OM and are cleared by the Clearing Corporation of India.
While Cash Management Bills are technically tradable on the secondary debt market, retail investors face severe barriers.
As CMBs are outside the RBI’s Non-Competitive Bidding Scheme, the retail route available for Treasury Bills does not extend to them. Due to competitive bidding, access to the auction is limited to major financial institutions.
Retail and High Net Worth Investors (HNIs) looking for CMBs utilize the secondary market via a Demat account and a registered broker to buy bills that institutional participants acquire at auction.
The issuance of Cash Management Bills is governed by the RBI. The Securities and Exchange Board of India (SEBI) governs regulations related to brokers and the Demat accounts used to hold securities.
Cash Management Bills: Taxation
Cash Management Bills are zero-coupon instruments, meaning they generate no interest. When a CMB is redeemed or sold, the difference between the redemption or sale price and the purchase price is usually treated as a capital gain. Any such gain is short-term, as CMBs mostly mature within 91 days. Tax treatment depends on an investor's circumstances and how the security is held.
Disadvantages of Cash Management Bills:
- Reinvestment risk: Proceeds on maturity may have to be reinvested at potentially lower yields as tenures are short.
- Liquidity risk: Selling Cash Management Bills before maturity depends on secondary-market demand at a particular point in time. The price may differ from the original discount.
Conclusion
Cash Management Bills function as an additional investment opportunity for investors to park their surplus funds. The short-term securities are backed by the government, meaning they carry little risk.
CMBs are issued at irregular intervals to provide emergency funding or absorb excess liquidity. They differ from T-Bills and Ways & Means Advances in yield, target investors, and purpose.
