Zerodha’s Nikhil Kamath says India is inviting trouble by allowing government securities be considered as cash on margin loans, which US doesn’t permit
Nikhil Kamath, co-founder of stock broking firm Zerodha, said it’s better that Indian banks are conservative unlike the American ones. However, Kamath flagged a systemic risk with India’s government securities, which are considered as cash on margin loans in the country, something that US doesn’t permit.
He said this during the fourth episode of Kamath’s podcast series, which featured social media influencer Tanmay Bhat along with Umang Bedi (co-founder of VerSe) and Aprameya Radhakrishna (founder and CEO of Koo) and Varun Mayya (CEO of Scenes).
Kamath said long-dated paper in India works the same way as the treasury bills in the US. These long papers are called government securities or G-secs. “Government securities haven’t hit us as much as in US, because we have gone from 4.5% to 6.5%, which is like 20-30% change. If a rate of change event like the US occurs and 6% becomes 12%, 15% or 20%, here too for everybody holding G-secs there will be mark-to-market losses.”
“Everyone has G-secs – banks, brokers, insurance companies, everybody,” he added.
He believes that treating G-secs as cash is a long-term systemic risk in the system, which has to be changed. “If someone is buying a financial instrument with mark-to-market component, it carries a certain duration risk. If I am buying 20-year debt under any category, but there is a mark-to-market element and interest rates go suddenly up or down, things can go very wrong,” he added.