‘Systemic risk’: Zerodha’s Nikhil Kamath flags the big problem with G-Secs

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.

He also tried suggesting a solution for this. He said that government shouldn’t consider it as cash, which is being done at the moment.

“So, for example, you are buying a stock, Rs 100 worth of Infosys. So, to get full margin from that stock, you need Rs 100 cash to create a pledge and get a full margin. Today G-sec is considered cash. I think that’s a systemic risk,” Kamath explained.

Kamath also weighed in on the ongoing US banking turmoil. He criticised the US government for repealing a few acts like Glass Steagall and Dodd-Frank, which took away the oversight of the regional banks in the United States.

While talking about Silicon Valley Bank’s (SVB) collapse in his latest podcast, Kamath said that if you look at the scenario, the interest rate in the US went up from a 0.25% to 5%. That rate change is effectively 800%-1,000%.  

This was a big reason why banks like SVB failed. A loss of 1,000% on 60-70% off the total investments is catastrophic, which was the biggest undoing of America's regional banks.  

He said SVB-like banking crisis could happen in India also, but it is currently not possible since the rate of change in interest is not the same as US.

Kamath also insisted that he's not against capitalism. "It’s just that capitalism has to change to a version of anomalies. Amid people with disproportionate reward of capitalism, there needs to be a change to make the society more balanced in providing opportunities. It can happen through either tax slabs, inheritance tax, property tax, estate tax etc. If you meet Bill Gates, you see things like estate tax, inheritance tax. There is so much precedent. Like if you look at US, if you are dying and giving money to your kids, you give 30%-35% of tax. You go to UK, it is the same.”

Also read: Zerodha's Nikhil Kamath shares what 19 years of stock market trading has taught him

Also read: 'Quick trip to Bengaluru should...’: Zerodha’s Nikhil Kamath says start-up funding winter has formally begun