Only banks can provide retail push to G-Secs

Retail investors need banks to play the role of market maker, facilitate KYC, and turn G-Sec into an FD-like product from the government

It is said that movies represent the culture in which they are made. Assuming this is true, the contrast between what constitutes safe investments for the common investor in Western culture (as represented by Hollywood) and Indian culture (as represented by Bollywood) is there for all to see. In many Hollywood movies like The Last Holiday or Trading Places, where the characters rustle up their lifelong savings for a particular twist in the plot, they always encash a cache built up in low-yield government securities (G-Secs) over a lifetime of hard work. Contrast this with Bollywood movies, where the same cache comes from PF (provident fund), FDs (fixed deposits) or jewellery. Picture the investments made by the most risk-averse middle-class person you know – I bet it throws up the same image of PF and FDs.  

Until now, the government has missed out on tapping the common investor’s savings directly. The government-guaranteed small savings instruments, such as Public Provident Fund, Senior Citizens Savings Scheme, National Savings Certificate, etc. come at a high cost. The government pays higher interest, forgoes revenue to provide tax incentives, and pays service charges to intermediaries. It has relied more on banks to garner funds from the common investor. Banks, in turn, invest a portion of those funds in G-Secs in the form of Statutory Liquidity Ratio (SLR) investments. Similarly, a substantial part of the funds garnered by insurers through traditional polices are invested in G-Secs.  

Direct retail investment in G-Secs, though enabled, is negligible. If the words “government guaranteed” are used for any investment product in India, it is bound to be a success, even if interest rates are relatively low. Recently the Reserve Bank of India (RBI) allowed individuals to hold G-Secs directly in the RBI system, removing a key operational hurdle to direct retail investment in them. But this is not enough. 

Let us apply the classic parameters of investment to retail investment in G-Secs – risk, return and liquidity, and add operational convenience to the mix. The risk and return parameters play out well enough. The key issues are liquidity and operational convenience. The depositor can encash bank FDs prematurely. This liquidity assurance, though rarely used, is a significant enabling factor in getting more deposits. Some experts feel market makers will spring up for G-Secs who will provide liquidity. They are assuming the stock markets will provide the same level of liquidity to G-Secs that banks provide to their depositors. I doubt they can play this role efficiently. Retail investors need the same ease of purchase and redemption as they enjoy in bank FDs. It means the ability to invest whenever and wherever with guaranteed liquidity assurance. The sensitivity is to the easy availability of liquidity, not to its cost (since the facility is seldom used). 

G-Sec market jargon like current yields, yield to maturity, etc. will be like Latin or Greek to retail investors. They need banks to play the role of market maker with daily two-way quotes for each security, ease KYC requirements for them, and turn G-Sec into an FD-like product from the government with fixed interest pay-outs, return of principal on redemption, and guaranteed liquidity in the interim. Banks will do this even though it will cannibalise their deposits for the same reason they sell third-party products – the fee income they earn and the money they can make as market makers providing liquidity.

Retail investment in G-Secs is an idea whose time has come. It is bound to happen though there could be a few hiccups along the way.

The writer heads Fee Only Investment Advisers LLP, a Sebi-registered investment adviser