• APRIL 28, 2001

"Our vision is to become a key player in the debt market."

An MBA from Punjab University, Chandigarh, Mr. Arun Kaul is the Managing Director of PNB Gilts Ltd. (a subsidiary if Punjab National Bank). Mr. Kaul who is a member of Primary Dealers’ Association of India and The Associated Chamber of Commerce & Industry of India, has a rich 22 years of experience in banking & finance.

Mr. Kaul has been a PNB man since 1983. He started his career with Punjab National Bank as Senior Manager, Credit and rose through the ranks to become Chief of Credit Operations and Chief of Investments. Prior to joining PNB Gilts as Managing Director, he also held the position of MD, PNB Asset Management Company for a brief period of less than a year.

In an interview with Equitymaster.com Mr. Kaul spoke of PNB Gilt’s strategy in its lines of business, the outlook on debt markets and the management’s vision for the company in the coming years.

EQM: Please give us an insight into the current scenario of debt market and outlook in the next one-year.

Mr Kaul : The government securities market constitutes a major component of the Indian debt market. For the growth and development of a vibrant debt market it is imperative to have a decontrolled interest rate structure. In India, the developments of the debt market began only in the nineties when the Reserve Bank of India decided to move away from the administered interest rate mechanism. Despite the dismantling of the administered interest rate structures in early nineties, the development of the debt market is still at a nascent stage.

The growth commenced with the introduction of Primary Dealers. In 1994-95, the turnover in the debt market was Rs 213 bn only. After the introduction of PDs in 1996-97, the turnover increased to Rs 939 bn. Further growth was witnessed with the introduction of new players and new PDs and turnover of the debt market increased to Rs 1,875 bn in 1998-99 and Rs 4,570 bn in 1999-00. World over the debt markets are much larger than the equity markets. In India however, it is vice versa. Against a debt market turnover of Rs 4,570 bn the turnover of the equity markets was Rs 20,670 bn in 1999-2000. We expect the debt market turnover to atleast equal that of the equity markets over the next few years. The setting up of the Clearing Corporation, along with entry of new players like insurance companies, pension funds, trusts, corporates and introduction new instruments, the market is poised for exponential growth in the years to come. Over the next one year the debt market turnover is likely to touch Rs 10,000 bn.

EQM: What is your outlook for the interest rates during the current fiscal?

Mr Kaul : Interest rates appear to remain stable during the year. The year closed with the yield on 10 years government securities ending lower by 16 basis points (from 10.51% to 10.35%). The macro economic factors are giving positive signals, inflation is declining, and is likely to be around 5%, foreign exchange reserves are at a high of US$ 42 bn, and liquidity in the system is comfortable. All these factors indicate a lower interest rate regime. In the US too, federal rates are on the decline. The intentions of the government are towards lowering of the interest rate structure in the economy, by reducing the existing rigidities in the system. It was in this regard that the government had reduced the interest rate on small savings scheme and PPF. With a large interest burden, it is in the government's interest to maintain a lower interest regime. However, the interest rates may remain volatile some time during the year, if there is a pressure on the rupee, or any other adverse features on the external front.

EQM: What is the long-term vision of the company? Where do you see the company 5 years down the line?

Mr Kaul : Over the next few years the debt market is poised for a quantum leap, and the turnover of this market is likely to equal that of the equity markets. To be a sizeable player in the market, the company requires larger funds. Our long-term vision is to become a key player in the debt markets. Over the last 5 years, PNB Gilt’s networth has increased from Rs 0.5 bn in 1996 to about Rs. 3.25 bn in 2001. Over the next few years, the company proposes to substantially increase its networth. We plan to continue with our aggressive marketing efforts to add more depth to the debt market by bringing new players to the market and also finding new applications of government-securities and treasury bills. With the introduction of certain legislative changes like setting up of a clearing corporation, amendment in the Public Debt Act, the debt market would witness exponential growth in the next few years.

EQM: What will be the impact of the recent RBI proposal of disallowing non-banking companies to operate in call money market?

Mr Kaul : In most of the developed countries, the call money market is restricted to a purely inter-bank market. The non-banking entities explore other avenues. This move by the RBI would help in having the non-bank entities use other options like repos, treasury bills, and inter-corporate lending for deploying their short-term surpluses. It would also help in developing the repo market as well as the use of treasury bills as cash management products.

EQM: Kindly give us some idea about constituent subsidiary general ledger (SGL) facility?

Mr Kaul : The RBI has allowed Primary Dealers (PDs) to have a second SGL account in the books of Public Debt Office of the RBI called Constituents Subsidiary General Ledger Account (CSGL). Primary Dealers have been permitted to act as custodians on behalf of their constituents/clients for holding their treasury bills and government securities in scripless/ dematerialised form in accounts known as Gilt Accounts or CSGL accounts. A gilt account is generally maintained by the investors with PDs for holding their treasury bills and government securities in the dematerialised form. The beneficial ownership of the treasury bills and government securities held in such accounts vests with the constituent investors who are also referred to as Gilt Accountholders (GAH). A gilt account can be compared with a bank account, except for the difference that the account is debited or credited with treasury bills or government securities instead of money. Any entity including firms, companies, corporate bodies, institutions, state governments, provident funds, trusts, NRIs, overseas corporate bodies and foreign institutional investors registered with SEBI and RBI are eligible to invest in government securities and also open a gilt account.

EQM: What are the advantages of opening a gilt account?

Mr Kaul : Treasury bills and government securities are maintained in a demat form. As a result it obviates the necessity for physical movement of scrips. This facilitates expeditious transactions process. As a result it reduces counter party risk due to speedy settlement. The government securities are transferred to gilt account on the settlement day. Collection and payment of maturity proceeds and interest is faster as this would be collected by the primary dealer, and paid to the gilt account holder. Also an option of conversion into physical scrips when required is available to the gilt account holder and there is no need of registration of security with the Public Debt office of RBI.

EQM: What is the outlook for retail debt market? What kind of measures the company is taking to improve the awareness about the retail market?

Mr Kaul : World over a sizeable component of debt market products is held by individuals. In India also, the retail debt market is poised to grow with the introduction of new products and the development of an extensive retail network to reach across the country like bank branches. With investors having burnt their fingers in the stock markets as well as mutual funds, the appetite of risk averse/low risk products is witnessing a growth. PNB Gilts had started retailing government securities to individuals through its corporate office in Delhi and branches in Mumbai, Chennai, Calcutta and Ahmedabad. To simplify the settlement and delivery of G-Secs for individuals, the company entered into an agreement with NSDL, so that individual can hold G-Secs in the same demat accounts in which they hold equity shares. The company launched a scheme for retailing of government securities to individuals in January 2001. The key problem in retailing government securities is the lack of awareness amongst investors about government securities being a viable investment option, and lack of reach across the country. With the objective of creating awareness about government securities as an investment option for individuals the company carried out an advertisement campaign in Economic Times for a period of 3 months. In addition the company has also printed leaflets for distribution amongst individuals.

EQM: What are the synergies with Punjab National Bank?

Mr Kaul : The parent organisation Punjab National Bank has a network of over 4,000 branches across the country and a deposit base of about 30 m depositors. With the objective of leveraging on the strength of PNB's branch network, the company has commenced retailing of government securities through its 10 branches. It gradually proposes to expand this facility to other centres through PNB's network as well.

EQM: How does the company manage to insure its revenues against volatility in interest rates?

Mr Kaul : We follow a prudent risk management system to mitigate risk. At present the company funds its portfolio through its net owned funds, call money borrowings and RBI refinance. With the objective of reducing risk due to interest rate volatility the company is exploring options of other sources of funds, as well as diversifying into swaps to use them as hedging products. On the assets side, the company makes use of the various risk management tools like value at risk, sensitivity analysis, duration etc. In addition the company has realised that aggressive trading of government securities also helps in mitigating risks. The strong research of PNB Gilts helps in visualising interest rate movements and taking positions accordingly.

EQM: What is the biggest challenge the company faces in debt market operations?

Mr Kaul : The challenges faced by the company are as follows:

  • Lack of depth in the market since the holdings of government securities are concentrated in the hands of institutional players.

  • There is no clearinghouse facility available at present for debt instruments.

  • DVP (delivery versus payment) system is available only through RBI for SGL accounts.

  • Treasury bill and repo transactions in government securities can be settled only in SGL at RBI Mumbai.

  • No online bidding system.

  • Lack of awareness amongst non-bank entities about government securities as a feasible investment option for investing their long term and short-term funds.

  • Negligible secondary market for other debt products; debt instruments issued by corporates, FIs etc. are not actively traded in the market.

  • Problem of widening reach and distribution systems. As at present only NSE WDM (wholesale debt market) and BSE brokers are permitted to deal in government securities. These brokers do not necessarily have a presence across the length and breadth of the country thereby making it difficult to reach out to smaller non-bank entities and individuals across the country.

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