‘Big reforms: RBI gives retail investors direct access to Government gilt bonds’

In a major move aimed at encouraging small investors to become direct investors in government bonds, the Reserve Bank has proposed to allow them to directly buy government debt, also called “gilt bonds”, making India the first Asian country to do so and among a handful globally.

• Terming it a “structural reform”, the RBI has proposed to allow retail investors direct access to its platform.
• The move is aimed at deepening the government securities (G-sec) market and to help smooth sailing of the government’s large yearly borrowing programme of around Rs 12 lakh crore.
• It is one of a series of steps that the Reserve Bank has been taking since January 2002 to increase the participation of a larger number of people in the purchase of government securities.

• Though commercial banks and asset management companies dominate the G-Secs market now, the RBI’s decision would provide a new risk-free investment option for retail investors.

What are Gilt Funds?

• Gilt funds are debt funds that invest in government securities. The government bonds used to be issued in golden-edged certificates.
• The nickname gilt comes from gilded edge certificates.
• As per Sebi norms, gilt funds have the mandate to invest at least 80% of their assets in government securities.
• Types: There are two kinds of gilt funds.
  • One, gilt funds that invest mostly in government securities across maturities.
  • Two, gilt funds with constant maturity of 10 years – these funds must invest at least 80% of their assets in government securities with a maturity of 10 years.

• G-Secs are tradeable investment instruments issued by the Central or state governments and are the most risk-free sovereign-backed bonds available in the country.
• They can broadly be classified into four categories, namely Treasury Bills (T-bills), Cash Management Bills (CMBs), dated G-Secs, and State Development Loans (SDLs).
• These securities are available in both short-term and long-term tenures — ranging from three months to 30 years — with an annual yield starting from 3.37 per cent.

• Although government securities do not carry credit risk, they are not a risk-free instrument.
• They are subject to interest rate risk. If the interest rates go up, the bond prices fall.

• Regularisation: The decision will encourage formalisation, digitisation, and financialisation of savings with low yield non-financial assets expected to move to better yield and secure instruments.
• Secure and fixed income: Besides opening a near endless demand source, it will also provide the retail investors a highly secure - sovereign-guarantee rated - fixed income investment avenue.
• Competition to regular investment plans: Apart from supporting the government’s expanding borrowing programme, the move may also pose competition to fixed deposits of banks and other debt instruments in the market.
• Denationalisation of banks: This decision could also provide elbow room for the Central government to reduce its presence in the banking sector. Today, an average citizen of India is most comfortable banking with PSU banks. Sixty-five per cent of total deposits in the banking sector are with the public sector banks for the mere reason that they are owned by the government.
  • If most risk-averse depositors could be persuaded to shift to the G-Secs, the government could go ahead with the denationalisation of banks at a faster pace.

• Currently, the RBI allows small investors to buy government bonds via the Gobid platform on BSE and NSE, but it has not gained any traction.
• Also, there exists a window for retail investors where they can place their buy and sell orders through intermediaries who buy from Negotiated Dealing System-Order Matching (NDS-OM) platform, convert that security from subsidiary general ledger (SGL) to demat form and then transfer it to individual demat accounts.
• This normally takes 4-5 working days. Retail investors' participation remains low.

However, there still remain a few challenges.

• Less interest rate: Since g-secs carry low risks, the commensurate returns offered are also low. Interest rates have not been attractive when compared to other fixed-income instruments like company fixed deposits, small saving instruments and non-convertible debentures.
• Poor liquidity: Poor liquidity in the secondary market is a cause of concern for most investors. Though NSE-GoBID facility or platform allows investors to buy gilts in the auctions and receive it into their demat accounts, baring rare cases, there are no volumes on the exchanges. The only way out for the investors to sell these bonds is to transfer them to a constituent subsidiary general ledger (CSGL) account and then sell it.
  • The CGSL is a sort of a demat account that holds government securities and facilitates trade on Negotiated Dealing System- order matching system (NDS-OM).
• Huge investment required: Another big problem is the lot size required to trade in g-secs. Typically, g-sec market sees trades worth Rs 5 crore and above. There’s little liquidity if you wish to buy and sell g-secs worth an amount less than Rs 5 crore. Such trades, if they happen, do not take place at fair price. In most cases, you are forced to hold the bond till maturity.

The Central Bank of India has been encouraging retail participation in the government securities market for long with several initiatives like introduction of non-competitive bidding in primary auctions, permitting stock exchanges to act as aggregators/facilitators for retail investors and allowing odd-lot segment in the NDS-OM (negotiated dealing system-order matching) secondary market, among others, in the past. Now, this new effort will effectively increase retail participation in government securities and also improve ease of access.