Bank & Government Security (G-Sec)

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 Bank

  • Bank act as a Regulatory of Cash flow through Interest rate.
  • Example
    • Bank give loan at 3% interest rate – More loan, High cash flow.
    • Bank give loan at 8% Interest rate – Less loan, Low cash flow.
    • RBI used, Interest rate as one of the Monetary control measure for money supply).
Government Security (G-Sec)
  • Borrowing tool for Government through RBI by realizing G-Sec.
  • Long term G-Sec – (more than 1 year): Both Union & State govt issue, Short Term: Only Union Govt release
  • G-Sec has Face Value, Maturity Period & Copon Rate (Interest).
  • If Govt need 500 Crore, Release 500 bonds (1 Crore each) with maturity period & Interest Rate. Anyone (Bank, Private, firms, also NRI (but some restriction) can give money to RBI and get G-Sec. Banks (RBI also buy) are higher purchase if G-Sec.
  • G-Sec is Tradable.
  • Example: On 2020, Govt release 1000 rupees’ bond at 5% copon rate, 5-year maturity. Person A buy from RBI at 950.
  • On 2023, Person A need urgent cash, so sell the G-Sec to Person B at 960 Rupees. (A buy at 950 and sell at 960, A get 10 Rupees profit, B buy at 960, at the time of maturity get 1000. B Buy at 960 & get 1000, 40 Rupees Profit).
  • Yield Rate: Profit getting out of G-Sec (A get Rs. 10 & B get Rs.40). – It also be negative (Ex: If Person A Sell G-Sec at 940 to Person B, Person A has Rs 10 loss & Person B get Rs 60 as Profit. – Yield rate of Person A is negative).
  • Copon Rate: If 1000 Rupees bond at 5% Copon rate with maturity period of 5 years. We buy bond at 950 rupees from RBI, after 5-year RBI give 1000 rupees and get back the Bond.
Twin Balance Sheet Problem – Both Bank & Firms are in Loss.

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