Share of non-bank entities holding G-secs increasing since Covid: RBI paper

Amid rising sovereign debt coupled with diversification of the investor base for government securities (G-Secs), the share of non-banks’ ownership of G-Secs has been increasing since the Covid pandemic, as per an RBI paper.

“Although the average ownership of banks has been historically higher compared to other investor groups, lately there has been an increasing uptake of government securities by non-bank investors,” said the paper titled “Shifting Tides: Growing Influence of Non-Bank Investors in the G-Sec Market in India”.

The paper has been authored by Amit Pawar, Mayank Gupta, Abhinandan Borad, Subrat Kumar Seet, and Deba Prasad Rath from the RBI’s Department of Economic and Policy Research.

The outstanding stock of G-Secs increased from ₹19.3 lakh crore, or 35 per cent of GDP, in March 2009 to ₹93.7 lakh crore, or 35.3 per cent of GDP in December 2022.

G-Sec holdings

In response to the nearly fivefold increase in total outstanding, G-Sec holdings of commercial banks increased less than fourfold from ₹9.4 lakh crore to ₹33.9 lakh crore. Their share of the total outstanding fell from 46.9 per cent to 36.1 per cent.

On the other hand, the share of insurance companies increased from 23.2 per cent to 26.1 per cent. The share of mutual funds, foreign portfolio investors (FPIs), and others increased over the period, whereas that of provident funds declined. Investors such as corporates and cooperative banks also grew at a slower pace.

As of December 2022, insurers held G-Secs worth ₹24.5 lakh crore; the RBI held G-Secs worth ₹13.8 lakh crore; provident funds held ₹4.4 lakh crore worth G-Secs; pension funds worth ₹3.7 lakh crore; and mutual funds worth ₹2.7 lakh crore, among others.

Debt holdings

Compared with banks, non-bank investors are more sensitive to changes in G-Sec yields due to different regulatory norms and business models. Thus, for a 1 percentage point increase in yields, domestic banks increased their debt holdings by 9.8–10.2 per cent, whereas non-banks increased their holdings by 10.8–11.1 per cent.

The study also found that a 1 per cent increase in the supply of new debt would lead to a 9.5–10 bps increase in the G-Sec yields. When all the new debt is absorbed by banks, the average increase in yield, or the government’s borrowing cost, is 8.1 per cent higher compared to when all the debt is absorbed by non-banks.

“These findings highlight that the Reserve Bank’s sustained measures aimed at diversifying the investor pool for G-Secs are well calibrated and aligned with debt management objectives of cost optimisation, risk mitigation, and market development,” the paper said.