Collateralized Borrowing and Lending Obligation

Introduction

• Collateralized Borrowing and Lending Obligation (CBLO) was launched by the Clearing Corporation of India Limited (CCIL) in 2003 to provide liquidity support to non-bank entities, who are restricted to access funds from the Call Money Market.
• CBLO is an obligation by the borrower to return the borrowed money at a specified future date.
• CBLO is a discounted instrument available in electronic book entry form for the maturity period of 1 day to 19 days.

Features of CBLO

• Cooperative banks, commercial banks, insurance companies, mutual funds, and primary dealers who are the members of the negotiated dealing system (NDS) are allowed to participate in CBLO transactions.
• NBFCs, pension funds, provident funds and trusts are also allowed to participate in CBLO segments but they have to take membership for CBLO segments.
• CBLO has two market segments – normal market and auction market. 

1. Normal market: It is a continuous market where members can borrow and lend on an ongoing basis. This market can be accessed for borrowing funds to the extent of their available borrowing limits.
2. Auction Market: Under the auction market, members based on the borrowing limits fixed by the CCIL.

• The borrowing cost in the CBLO market is low as compared to the call money market.
• Rates on CBLO fall when there is a fall in overnight call money rates.
• When CBLO rates fall, forex dealers borrow rupees from the CBLO market to buy dollars and simultaneously agree to sell it a day later. The money is then invested in overnight dollar deposits with banks abroad which give a higher return.