The involvement of the retail sector in government securities (G-secs) has been spoken of in the credit policy and steps are being taken to enable it. While the effort is laudable and necessary, we need to go back to the basics and evaluate why G-secs have not been of much interest to retail investors. The issue is not of accessibility; it is conceptual.
For a household to be interested in any retail financial product, the essentials are returns, simplicity and disposal. The focus has been on providing physical access through trading platforms, but the other issues have to be addressed.
Today the returns on government paper are fairly skewed. If we look at say the 90-day, 364-day treasury bills and 5- and 10-year paper on a random day, they read like 7.87 per cent, 7.78 per cent, 7.79 per cent and 7.75 per cent respectively. These yields vary on a day-to-day basis. Contrast this with a bank deposit where the returns are fixed with the same security and are also higher. A one-year deposit gives 8-8.5 per cent.
Further, the government has created an anomaly in its domain by pricing small savings better. While there are limits on Public Provident Fund (PPF), one can use post office instruments for diversification and get better returns. With there being no TDS one can also escape the tax network if one chooses to. In such a case why should anyone opt for a G-sec, which carries no tax benefits?
The second issue is that of simplicity. When a household is dealing with a savings instrument, it would like to know clearly what the attributes are. Now a G-sec is confusing even for a financially literate person. There is a face value and a market price, which varies every day. Then there is a coupon on a bond and a yield to maturity (YTM), which vary. This yield actually matters more than the coupon and is indicative of the return for tenure. Therefore, what should one be looking for if one buys a security in the secondary market? As the YTM changes every day, households cannot digest this easily.
Further, there is no clarity in the structure of these papers. A fixed deposit is a fixed deposit. In the G-sec market there several: 2, 3, 4…40 year securities whose tenures change every year. Also with a multitude of securities maturing in say 2020, there are different five-year bonds with different coupons, YTM and market prices. How is one to decide which instrument to invest in?
Also, the 10-year benchmark is the 8.40 per cent coupon bond maturing in July 2024. Factually, this does not have a 10-year residue term from today. Anyone dealing with this data will not know how to go about viewing such paper. All securities hence have a moving maturity period for being valued in the market. Also, all paper is issued through an auction and the cut-off price is different from the face value, which adds to the nebulous nature of these bonds.
This is unlike equity, where a share of a company is the same as any other share of the same company.
Third, disposal is a problem and if one looks at the CCIL trading screen, we do not have more than 15 securities traded on a daily basis, and not more than five of them will have more than 100 trades each. Therefore, even if an individual chooses to enter or exit there won’t be much choice.
Prima facie, this may not be an exciting market for the household. A way out is for the government to issue different papers at face value similar to tax-free bonds, of say, NHAI. To ensure that there is liquidity in the secondary market, banks can buy securities like PDs from individuals at any time at the going price. But then an 8.4 per cent bond for 10 years will be for a face value of 100 and not the auction determined price. The government has to pay a higher rate of interest. With PPF paying 8.7 per cent and post offices around 8.5 per cent for five years, it cannot get away with the present yield of around 7.79 per cent.
Taking into account all these factors, it looks like the G-sec market for retail will be a slow starter, as one side has to give in. Also if the government moves away to announcing fixed-rate bonds at a higher cost, then the rest of the market with accumulated debt of the government will go awry as all outstanding securities will be re-priced, adding considerable volatility.
It may be best for the household to enter this market through the mutual fund route till we can iron out these issues.
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