Investment by Banks

Investment by Banks


In simple words, investment means the employment of funds to buy an asset. Investment by banks means employment of funds to buy securities from the market. The following securities are purchased by the banker from the market.
Government securities: 
Government securities are the safest securities. The risk associated with these securities is almost negligent. These are guaranteed by the Government. To raise the fund's Government issue these securities. These are debt instrument issued by Government. In India these securities issued by Central Government and State Government. 

Types of Government Securities

Government securities classified into 4 types. They are
Dated G-Sec.
Treasury Bills (T-bills),
Cash Management Bills (CMBs), State Development Loans (SDLs).

Dated G-Sec


These are long term money market instruments. It's term ranging from 5 to 40 years. Banks held in these securities in the form of SLR.
For example

7.17% GS 2031 Means
Coupon: 

7.17% paid on face value.

Name of Issuer: Government of India.

Date of Issue:  May 7, 2021.

Maturity is May 7, 2031.

Coupon Payment Dates: 
Half-yearly (November 07 and May 07) every year.

Minimum Amount of issue/ sale: ₹10,000

These instrument having fixed rate or floating rate. It's called a coupon rate.

Coupon rate applicable on the face value of the instrument paid on a half-yearly basis as an interest.

Government issues 9 different types of Government Securities. They are

Fixed-Rate Bonds
Floating Rate Bonds
Capital Indexed Bonds
Inflation-Indexed Bonds
Bonds with Call/Put Options
Special Securities
STRIPS
Sovereign Gold Bonds
75% Savings (Taxable) Bonds, 2018.

Treasury Bills

These bills are issued by Central Government. These are short term money market instruments. Treasury bills maturity is less than 1 year. Treasury bills are issued with different maturity period 

91 days,
181 days,
364 days.

Treasury bills are known as Zero coupon securities. These are issued at a discount price and redeemed at face value.

Treasury Bill Example:

91 Days Treasury Bill face value is 100.
It may be issued at 98.
With a discount of 2.
It will be redeemed at a face value of 100.

Cash Management Bills (CMBs)

Cash Management Bills introduced by the Central Government and Reserve Bank of India in the year 2010. These are very similar to Treasury bills. 

State Development Loans (SDLs)

These are securities similar to dated G-Sec. The only difference is G-Sec issued by Central Government. SDLs are issued by State Governments.

Semi-government securities: 

Semi-government securities issued by semi-government. These securities include securities issued by organisations like 
Municipal Corporations,
State Financial Institutions.

Debentures or bonds included in the Semi-government securities.

Industrial securities:

Industrial securities issued by industrial/ business entities. 
Banks invest a small percentage of their funds in the shares and debentures issued by these industrial entities.

Apart from these securities, banks invest the amount in

Fixed deposits:

Banks do the fixed deposits with other banks. 

Mutual Funds:

Excess funds Banks invest in Mutual Funds for a shorter period. Whenever required they redeem the Mutual Funds.

Units and capital of various financial institutions. 

Conclusion

Banker gives a marked preference is noted in favour of Government and semi-government securities. Government Securities helps to balance the risk factor in an investment portfolio.

Dear readers if any queries comment.

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