Key Features of CBLO

Key Features of CBLO

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Collateralized Borrowing and Lending Obligation (CBLO) meaning implies short-term borrowing and lending in the financial market. CBLO is a type of money market instrument that enables investors to earn interest on their excess funds for a short duration while providing a source of short-term funding for borrowers. It was introduced in 2003 by the Clearing Corporation of India Ltd. (CCIL) so that non-banking entities that do not have access to the Call Money Market could receive liquidity support. It is a discounted instrument that is available in electronic book entry form and has a maturity period of 1 day to 19 days.

Collateralized borrowing and lending transaction happens when a borrower provides collateral in the form of securities or cash to the lender. CBLO is a secure and flexible way of borrowing or lending money in the short term. CBLOs are typically regulated by the Reserve Bank of India (RBI). In this transaction, the borrower provides collateral to the lender, which is held in a designated account with a clearing corporation. The collateral provides security for the lender in case the borrower defaults on the loan. The borrower can use the borrowed amount for any purpose, such as financing working capital needs or investing in assets with a higher return.

As the name implies, collateralized borrowing and lending obligation key includes collateral and maturity period. All CBLO transactions are collateralized and the collateral can be in the form of securities or cash. Also, this financial instrument has a fixed maturity period. Co-operative banks, insurance companies, commercial banks, mutual funds and all primary dealers who have a membership of negotiated dealing system can take part in CBLO transactions. Provident funds, trusts, NBFCs (Non-banking Financial Companies) and pension funds can also take part in CBLO segments provided they have a membership of those CBLO segments.

Collateralized borrowing and lending obligation method has two market segments – auction market and normal market. In the auction market, members can borrow depending on the borrowing limits as set by the CCIL whereas a normal market is a continuous market in which members can lend and borrow in an ongoing basis. It is a market that can be used for borrowing funds till the extent of available borrowing limits. Moreover, in a CBLO market, the borrowing cost is comparatively lower to a call money market.