India Post Office to retail govt bonds
AFTER small savings instruments, mutual fund products and bonds, now post offices are set to retail the Government securities (G-secs) through its countrywide network.
The Department of Posts and the Reserve Bank of India (RBI) have cleared a proposal from a leading primary dealer, IDBI Capital Market Services Ltd (ICMS) to offer G-secs from the secondary market to investors, through the network of the postal department. Investors having a demat account can buy the Government securities of maturities ranging from one to 25 years from the post offices by investing a minimum of Rs10,000 or in multiples.
All that a customer walking into a post office, where prices of the Government securities of all maturities will be displayed daily, needs to do is first fill in an application along with a cheque for the purchase of the security. The demat account of the customer will then be credited swiftly.
ICMS, a fully-owned subsidiary of IDBI, is planning to offer this product to investors in select post offices in Mumbai and New Delhi to start with by July-end. Prior to that, the staffers in the post offices selected to retail G-secs will be trained on the basics. This effort will be supplemented with brochures for investors and a help line desk.
The plan is to reach across to investors in over 10 major cities in the first year of operation and then expand to other towns and rural areas. Says the Managing Director of ICMS, Mr Nageswara Rao, “over the next two years, this could potentially emerge as a very large product. In the current scenario, no other product apart from the Government securities offers so much in terms of safety, liquidity, rates of return, tax benefits and a choice of investment spread across all maturities. Since investors access the post offices for small savings products, they offer the best network for selling G-secs also.”
Interest on the Government securities up to a limit of Rs 3,000 is exempted from tax under Section 80 L of the Income-Tax Act. The move to hawk the Government securities through post offices may well provide a boost to the Government and its debt manager, the RBI, in the medium and long-term. A shift in investment pattern away from small savings instruments in favour of gilts will help the Government reduce its cost of borrowing. The rate of return on a GoI security is lower in comparison to a small savings instrument such as a National Small Savings Certificate.
In the US for instance, treasuries which are marketable securities are far more attractive than savings bonds as the interest rate is reset semi-annually at 10 per cent less than the average yield of the five-year US Treasury. With the Government having taken note of the recommendations of the committee headed by Dr Y.V. Reddy, which wants the phasing out of all tax sops for small savings products with a maturity of less than six years and the move towards market-related pricing, a similar scenario could well emerge in India in a few years.
ICMS is hoping for support from the RBI and the Government in the form of an awareness campaign.
