G-Secs to floating rate bonds

G-Secs to floating rate bonds

Subject – Economy

Context – Govt announces switching two G-Secs to six floating rate bonds

Concept –

• The government announced the conversion or switch of two government securities (G-Secs), both maturing in 2022 and aggregating ₹36,000 crores (face value) into six floating rate bonds (FRBs) maturing between 2028 and 2034.
• Thus, the government does not have to redeem them on their maturity dates.
• The conversion or switch will take place through a multiple-price based auction.
• Bidding in the auction implies that the market participants agree to sell the source security/ies to the government, and simultaneously agree to buy the destination security from the GoI at their respective quoted prices.
• Market participants are required to place their bids through thee-Kuber portal, giving the amount of the source security and the price of the source and destination security expressed up to two decimal places.
• The price of the source security quoted must be equal to the FBIL (Financial Benchmarks India) closing price of the source security as on the previous working day.
• Bond price and yield are inversely correlated and move in opposite directions.

What are floating rate bonds?

• Unlike regular bonds that pay a fixed rate of interest, floating rate bonds have a variable rate of interest.
• The rate of interest of a floating rate bond is linked to a benchmark rate and is reset at a regular interval.
• Interest rate risk is largely mitigated as these bonds will pay higher return when prevailing rates are high.
• There is no certainty of the future stream of income when investing in a floating rate bond.
• The best time to buy floating rate bonds is when rates are low and are expected to rise.

E-Kuber

• e-Kuber is the Core Banking Solution of Reserve Bank of India.
• E-Kuber provides the provision of a single current account for each bank across the country, with decentralised access to this account from anywhere-anytime using portal based services in a safe manner.
  • Core Banking Solutions (CBS) can be defined as a solution that enables banks to offer a multitude of customer-centric services on a 24×7 basis from a single location, supporting retail as well as corporate banking activities, as well as all possible delivery channels existing and proposed.
  • The centralisation thus makes a “one-stop” shop for financial services a reality.
  • Using CBS, customers can access their accounts from any branch, anywhere, irrespective of where they have physically opened their accounts.
  • Almost all branches of commercial banks, including the Regional Rural Banks (RRBs), are brought into the core-banking fold.
  • Core Banking Solutions (CBS) marked a paradigm shift as it made a bank’s particular branch customers, now bank customers as they can access their accounts from any branch for defined purposes.
  • CBS links all branches of a bank and offers opportunities for information management, better customer service and improved risk management.
• e-Kuber enables ease of operations. The system also benefits state /central Governments as users.
• Some of the facilities offered include the provision of portal based access which allows Government departments to access on anywhere-anytime basis and view their balances – of all types including the Ways and Means Advances, drawings, funds positions and the like – all in a consolidated manner so as to help them in better funds management.
• The capability of consolidating revenue collections by banks through the e-Kuber offers the potential for better flexibility for the Government in managing its finances apart from moving over towards higher levels of electronic banking.
• The e-kuber system can be accessed either through INFINET or Internet.
  • The INFINET is a Closed User Group Network for the exclusive use of member banks and financial institutions and is the communication backbone for the National Payments System, which caters mainly to inter-bank applications like Real Time Gross Settlement (RTGS), Delivery Vs Payment, Government Transactions, Automatic Clearing House, etc.
• The e-kuber system, implemented in 2012, is reported to be one of the foremost central bank oriented Core Banking Systems in the world.
• Auction of Government securities is done through e-kuber system.
• Sovereign Gold Bonds are available for subscription at the branches of scheduled commercial banks and designated post offices through RBI’s e-kuber system.
• Goods and Service Tax (GST) settlements are also proposed to be done through e-kuber.
• On 7 April 2016, RBI launched a platform to enable trading in the priority sector lending certificates (PSLC) through its Core Banking Solution (CBS) portal (e-Kuber).
• Kuber refers to Lord Kubera – the lord of wealth in Hindu Mythology.
• Technology partner for RBI for launching e-kuber is Polaris Ltd.