Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

This week in personal finance

There are two categories of people who may benefit from a larger retail access to gilts

Buying G-secs through your demat account: Next week, you should be able to directly buy a dated government security or a treasury bill using your demat account. The Reserve Bank of India (RBI), in a 28 July 2016 notification (http://bit.ly/2b2LAfZ ), allowed account holders with National Securities Depository Ltd (NSDL) or Central Depository Services (India) Ltd (CDSL), to buy and sell government bonds through their banks. Let’s de-jargon this before we decide whether to buy these or not. Governments spend more than they gather—from taxes and other revenue streams—by borrowing. The government’s borrowing is facilitated by its banker, the RBI. The central bank sells short-term papers called treasury bills (tenures of 91 days, 182 days and 364 days) and long-term government securities (G-Secs), with tenures of up to 30 years.

These are sold through an auction process and then listed on the secondary market, where they are open to trading. RBI is now paving the way for easier retail access to these bonds. Why should you care? You already hold government bonds indirectly through your Public Provident Fund (PPF) account and other small-saving papers. You get a return closely linked to what the government paper sells for. You also hold government papers indirectly through bank fixed deposits (FDs), and traditional life insurance policies and annuities. You can also buy them using gilt funds. With so many avenues open, why would you want to buy directly, especially when the process is still complicated and few banks will rush in to make retail access easy to a product that will eat into their own market share of household savings?

There are two categories of people who may benefit from a larger retail access to gilts. One, the high net worth individuals (HNIs), who may want to harvest the extra yield that listed bonds sometimes give over other options in the market. “There have been times when the bond yields have been much higher than deposits and this works for HNIs who can also set off capital gains against losses made elsewhere," says Deepak Shenoy, co-founder of Capital Mind, a markets and macro analytics fintech firm. Two, the retired, who would otherwise buy an annuity for their post-retirement income. India does not have long-term, fixed-return options in the market today. So, opening up the market so that a retiring person can buy a 20- or 30-year government bond to fund a part of her retirement income, will yield a much better return than the current annuity products in the market.

The bankers I spoke to are not convinced that there will be much retail appetite for such bonds. The process will become clear once the segment opens next week, and it will need more sellers than just banks to make it work. The problem of allowing non-banks access to the NDS-OM (Negotiated Dealing System-Order Matching) trading platform is the underlying software, which allows only banks to access it. However, says one depository expert, there is already a web module that can allow non-banks to access the platform. It will depend entirely on the RBI’s will to make it open for non-banks because of the design change needed. It will take sellers other than banks to make the product really accessible to you and me—it is not in the interest of the banks to sell a product that competes with FDs. It is an evolving space, keep watching this space for more as it happens.

RBI sets up household finance committee: The RBI has set up a joint regulator committee headed by Oxford academic Tarun Ramadorai to look into various facets of household finance (http://bit.ly/2aIqPnZ). Interestingly, the committee will deliberate on: why Indian households prefer gold to financial assets, what they think about incentives for various financial products and evaluate the role of fintech. Two earlier Government of India committees have spent time thinking about some of these issues. Swarup Committee in 2009 ( http://bit.ly/2ax0GLm) recommended removal of front loads on retail products to address the issue of mis-selling. Bose Committee in 2015 (http://mintne.ws/1NeFMNj) went a step further and recommended a level playing field in the market where the function of the product would decide its rules, and not its form. This means that a unit-linked insurance plan (Ulip), which is more of a mutual fund than an insurance product, will have its investment part run by the Securities and Exchange Board of India (Sebi) mutual fund rules. And the endowment plans, which are more FDs than life cover, will have to be split into two and have their investment part regulated by RBI rules. The committee needs to understand that till the time the government is dependent on Life Insurance Corporation of India (LIC) to provide cheap money from households, no deep reform is possible in the retail market and financial repression will continue. Opening the retail market to direct G-secs is a great idea to side-step LIC, but it will take much more than just a circular to make it happen.

Irdai admits to bank mis-selling finally: After being in denial for a long time, the insurance regulator has finally admitted that banks mis-sell insurance plans. In a 1 August 2016 circular (http://bit.ly/2balExD), the Insurance Regulatory and Development Authority of India (Irdai) cautioned banks and other corporate agents against mis-selling, forced selling and fraud in selling life insurance. It said: “It is emphasised that refunding the money or allowing the customer to change the mode of payment or plan is not the solution for this vexatious issue. Instead the banks/NBFCs (non-banking financial companies) should have a system, which should proactively detect and discourage such kinds of misselling/forced selling/wrong selling." Now to move to the next stage of actually making it hurt to mis-sell.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com

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