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Banks invest in Gilt-edged securities (i.e. Government Securities) to achieve their obligations under SLR and also as a remunerative outlet for idle funds at their disposal. We have studied about government securities earlier, while studying about Reforms in Money Market and also Money Market of India - Dated Government Securities.
The Debt Markets play a very crucial role in any modern economy. And more so in the case of developing countries like India which need to employ a large amount of capital and resources for achieving the desired degree of industrial and financial growth. The Indian Debt Markets are today one of the largest in Asia and includes securities issued by the Government (Central & State Governments), public sector undertakings, other government bodies, financial institutions, banks and corporates. The Indian Debt Markets with an outstanding issue size of close to Rs.7000 Billion (or Rs. 7,00,000 Crores) and a secondary market turnover of around Rs.24,000 Billion (in the previous year - 2002) is the largest of the Indian financial markets.
The Government Securities (G-Secs) market is the oldest and the largest component of the Indian Debt Market in terms of market capitalization, outstanding securities and trading volumes. The outstanding volumes of Government Securities (Central & State) as at the end of 2002 is estimated at around Rs. 5,50,000 crores. The G-Secs. market plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yields on the government securities which are referred to as the risk-free rate of return in any economy.
The Indian Debt Markets are today poised on the threshold of momentous change and transition to an efficient, transparent and vibrant market with significant retail participation. The first half of the twentieth century had witnessed a significant amount of retail interest and participation in the G-Sec market with more than half the holdings of G-Secs issued being held by retail investors, a trend which continued until the early sixties. The administered interest rate regime and the emergence of other equity and debt instruments led to a gradual diminution in the investor interest and participation in the G-Sec market.
The Indian Debt Market structure was hitherto that of a wholesale market with participation largely restricted to the Banks, Institutions and the Primary Dealers. The rapidly expanding volumes in the Wholesale Debt Market over the past few years bear the promise of an immense and attractive financial market with a strong potential for retail participation. The Retail Debt Market in India is being created, thanks to the pioneering efforts of the Exchanges and the market participants and the strong leadership and guidance by SEBI, RBI and the Govt. of India.
We now propose to discuss how RBI ensures management of Public Debt in the Primary and Secondary Markets. In this context it will be useful to understand the function of Internal Debt Management Cell of RBI, which handles this function.
The Reserve Bank of India manages public debt and issues new loans on behalf of the central and the state governments under the powers derived from the Reserve Bank of India Act. It also undertakes cash and liquidity management for the Government of India and state governments and administers the scheme of ways and means advances.
Internal Debt Management Cell manages internal debt. This involves auctioning the government debt from time to time, introduction of new instruments, smoothening the maturity structure of debt, placing of debt at market related rates and improving depth and liquidity of government securities by developing an active secondary market for them. To administer the monetary policy it also undertakes liquidity operations as and when required through various instruments, such as, open market operations, repos and reverse repos, etc.
[Source: RBI Website]
In the next two articles the issues & challenges in the management of public debt by RBI are discussed in detail. Here suffice it to say that new issues of Government securities are off-loaded by Government to commercial banks & PDs, financial institutions, insurance companies, mutual funds etc. by conducting auctions. The government notifies the date on which it will borrow a notified amount through an auction. The investors bid either in terms of the rate of interest (coupon) for a new security or the price for an existing security being reissued. Since the process of bidding is somewhat technical, only the large and informed investors, such as, banks, primary dealers, financial institutions, mutual funds, insurance companies, etc generally participate in the auctions. Institutions which maintain current accounts, SGL, CSGL accounts with RBI participate in these auctions.
SGL or CSGL are a demat form of holding government securities with the RBI. SGL stands for 'Subsidiary General Ledger' account. It is a facility provided by RBI to large banks and financial institutions to hold their investments in Government securities and Treasury bills in the electronic book-entry form. Such institutions can settle their trades for securities held in SGL through a Delivery-versus-Payments (DVP) mechanism which ensures movement of funds and securities simultaneously.
As all investors in Government securities do not have an access to the SGL accounting system, RBI has permitted such investors to hold their securities in physical stock certificate form. Reserve Bank of India, being the R&T agent of all Government securities issued by Central and State Governments, keeps the records of holding of various investors in the securities issued. The SGL, in short keeps the names of all investor in a particular security at any point of time. The securities are held in electronic form in SGL accounts. They may also open a Constituent SGL account with any entity authorised by RBI for this purpose and thus avail of the DVP settlement. Such client accounts are referred to as Constituent SGL accounts.
Securities kept on behalf of customers by banks or PDs in Constituent SGL account are kept in a segregated CSGL A/c with the RBI. Thus, if the bank or the PD buys security for his client, it gets credited to the CSGL account of bank or PD with the RBI. Successful bidders are allotted securities bid by them. RBI can debit their current accounts for amount payable and credit their SGL account with the securities allotted to them. The amount debited to the current account is placed to the credit of Government Account.
In the same manner secondary market operations are also handled by RBI
Physical certificates always carry a risk of loss by theft, destruction, fire or forgery. Moreover, the custody, movement and registration of physical certificates involve cost and delays. When the securities are converted into SGL holdings the custody of such securities automatically lies with the RBI through the main SGL account holder. Thus, the system of holding and settling securities through the constituent SGL account is not only safe but is faster also as the delivery of funds/securities is ensured on the same day. Apart from the prompt settlement of trades, constituent SGL holders also benefit from prompt and virtually hassle free interest payments, redemption and other types of corporate actions.
The Reserve Bank of India has announced a facility of non-competitive bidding in dated government securities on December 7th 2001 for small investors. Participation in the Scheme of non-competitive bidding is open to individuals, HUFs, firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity prescribed by RBI. As the focus is on the small investors lacking market expertise, the Scheme will be open to those who do not have current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India do not require more than Rs.one crore (face value) of securities per auction
As an exception, Regional Rural Banks (RRBs), Urban Cooperative Banks (UCBs) and Non-banking Financial Companies (NBFCs) can also apply under this Scheme in view of their statutory obligations. However, the restriction in regarding the maximum amount of Rs. one crore per auction per investor will remain applicable. The details of the scheme are discussed in a separate article
Several measures were taken to continue the momentum initiated by Reserve Bank for developing the Government securities market. One of the important steps is setting up of the Clearing Corporation of India Ltd. (CCIL) with State Bank of India (SBI) as the chief promoter and five other banks and financial institutions as co-promoters. The CCIL will act as a central counter-party in the settlement of all trades in Government securities, Treasury Bills, Repos and foreign exchange. The CCIL will facilitate clearing and settlement of Government securities and foreign exchange transactions by reducing the counter-party risk through multilateral netting of transactions. CCIL will clear transactions in repos and Government securities between its members reported on the Negotiated Dealing System (NDS) of the Reserve Bank and also the rupee-U.S. dollar spot and forward deals. The Reserve Bank has already opened current account and SGL account for CCIL and given approval for its membership to Indian Financial Network (INFINET). CCIL is putting in place the hardware and software and has held many meetings with banks for finalising operational procedures/modalities, changes to systems of member banks, etc. The first phase of the project has gone live in November 2001, along with the commencement of parallel run of NDS.
NDS will facilitate electronic submission of bids/application by members for primary issuance of Government Securities by RBI through auction and floatation. The system of submission of physical SGL transfer form for deals done between members will, on implementation of NDS, be discontinued. NDS will also provide interface to Securities Settlement System (SSS) of Public Debt Office, RBI, thereby facilitating settlement of transactions in Government Securities including treasury bills, both outright and repos.
These new innovations i.e. NDC and CCIL are discussed in detail in subsequent articles
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