“Government Securities Lending (GSL) transaction” refers to dealing in government securities involving lending of eligible Government securities for a GSL fee by the owner of those securities (the lender) to a borrower, on the collateral of other Government securities, for a specified period of time, with an agreement that the borrower shall return the security borrowed to the lender and the latter shall return back the security received as collateral to the former at the end of the agreed period.
Shaktikanta Das, governor of the Reserve Bank of India (RBI), suggested on February 8 that government assets be borrowed and lent to increase market liquidity and price discovery. Das stated when introducing the monetary policy committee's choice, "This will give investors an avenue to spend in their ideal securities, improve portfolio returns, and enable broader involvement.
"Das continued by saying that this action will increase the breadth and liquidity of the G-Sec market, facilitate effective price discovery, and advance the conclusion of the centre and states' smooth market financing programme. On February 17, the Reserve Bank of India (RBI) released a proposed set of rules for borrowing and lending government assets. The action is intended to increase market liquidity and price discovery. The RBI first introduced the borrowing and loan of government assets in the February monetary policy. Banks, market players, and other interested parties are asked to submit comments on the Draft Directions by March 17, 2023.
Government securities loan (GSL) deals, according to the RBI, can be carried out for a minimum of one day and a maximum of 90 days. Regarding eligible assets, it stated that only central government-issued securities, excluding Treasury Bills, would be permitted for loan and borrowing in a GSL deal. The Central Government's (including Treasury Bills) and State Government's securities shall be eligible for use as security in a GSL deal, according to the RBI.
Additionally, it was stated that GSL trades could be conducted using any jointly agreed-upon trading process, including but not limited to bilateral or multilateral quote-driven or order-driven processes, whether anonymous or not. Any entity authorised by the RBI to conduct government securities repo transactions as well as any other entity will be qualified to take part in loan transactions involving government securities as a dealer of securities.
The guidelines for loaning and acquiring government assets are outlined in the Draft Reserve Bank of India (Government Securities Lending) Directions, 2023. These regulations state that Government Securities Leasing (GSL) deals can last a minimum of one day and a maximum of ninety days.
The draft norms also provide for the following (a) The securities lending transaction should be executed through an approved platform, and the settlement should take place on the same day (b) The transaction should be carried out only between registered entities i.e. entities that are eligible to deal in government securities as per the RBI’ guidelines (c) The lending of securities can only be done against cash collateral (d) The lending fee, which is the fee charged for borrowing securities, should be based on market conditions (e) The lender can recall the securities at any time during the term of the transaction (f) The borrower should maintain the securities in the same form and manner as received from the lender.
Several advantages are anticipated from the advent of borrowing and lending of assets in the market for government securities. Investors will have the chance to use idle assets to boost the profits on their portfolios. The government stocks market will become more liquid thanks in part to the securities loan market. The effective price finding of government assets will benefit from this. The growth of repo markets will also be assisted by the stock loan market. Repo markets are places where assets are borrowed and lent on brief notice. The growth of the repurchase market is anticipated to contribute to the money market's effective operation. Additionally, it will aid in the dissemination of monetary policy.