📘 What is a Gilt Fund?

A Gilt Fund is a type of debt mutual fund that primarily invests in government securities (G-secs). These are bonds issued by the central and/or state governments to borrow money. As such, gilt funds carry zero credit risk, since they are backed by sovereign guarantee, but they are sensitive to interest rate movements.

Key Features of Gilt Funds:

Feature	Description
Underlying Securities	Government bonds (short to long-term maturity)
Risk Level	Low credit risk, but high interest rate risk
Return Expectation	Moderate returns, typically 5–7% p.a. over medium to long term
Investment Horizon	Ideal for 3–5 years or more
Liquidity	High, as most gilt funds are open-ended
Regulation	Regulated by SEBI

🔹 What is a Gilt Fund Account?

A Gilt Fund Account is a folio or investment account through which an investor can:

• Invest in one or more gilt funds

• Monitor NAV, holdings, and returns

• Redeem or switch between debt schemes

It may be referred to as a Mutual Fund Account with exposure specifically to Gilt Funds. Some platforms also offer direct gilt investments via RBI Retail Direct Gilt Account, allowing investors to buy G-Secs directly from RBI.

RBI Retail Direct’:

As part of continuing efforts to increase retail participation in government securities, ‘the RBI Retail Direct’ facility was announced in the Statement of Developmental and Regulatory Policies dated February 05, 2021 for improving ease of access by retail investors through online access to the government securities market – both primary and secondary – along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI.

In pursuance of this announcement, the ‘RBI Retail Direct’ scheme, which is a one-stop solution to facilitate investment in Government Securities by individual investors is being issued today. The highlights of the ‘RBI Retail Direct’ scheme are:

i. Retail investors (individuals) will have the facility to open and maintain the ‘Retail Direct Gilt Account’ (RDG Account) with RBI.

ii. RDG Account can be opened through an ‘Online portal’ provided for the purpose of the scheme.

iii. The ‘Online portal’ will also give the registered users the following facilities:

1. Access to primary issuance of Government securities
2. Access to NDS-OM.

🔄 Gilt Funds vs Share Market – A Comparison

Particulars	Gilt Funds	Share Market (Equity Investment)
Nature of Investment	Government bonds (debt instruments)	Equity shares of listed companies
Risk Level	Low credit risk, high interest rate risk	High market, business & volatility risk
Returns	Moderate & stable (linked to interest rates)	Potentially high but volatile
Ideal for	Conservative or debt-oriented investors	Growth-seeking and risk-tolerant investors
Investment Horizon	Medium to long-term	Long-term (ideally >5 years)
Volatility	Low to moderate	High
Regulation	SEBI, RBI	SEBI, Stock Exchanges
Liquidity	High in open-ended funds	High for listed shares
Taxation (LTCG >2Y)	12.5% with indexation (for funds held >2 years)	12.5% LTCG on gains > ₹1.25 lakh

📈 Who Should Invest in Gilt Funds?

• Investors looking for safety of capital with moderate returns
• Suitable during falling interest rate cycles (bond prices rise)
• Ideal for diversification in low-risk portfolios

⚠️ Risks to Consider

• Interest Rate Risk: As rates rise, bond prices fall, affecting NAV.
• No Credit Risk, but duration risk is higher in long-term gilt funds.
• Not ideal for short-term parking due to volatility from rate changes.

📑 Source References:

1. SEBI – Mutual Funds Regulations: https://www.sebi.gov.in

2. RBI Retail Direct Scheme: https://rbiretaildirect.org.in

3. AMFI – Gilt Fund Details: https://www.amfiindia.com/investor-corner/knowledge-center/types-of-mutual-funds

Disclaimer: This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.

Nostro and Vostro accounts are two types of bank accounts used in international banking transactions. These terms originate from Latin, with Nostro meaning “our” and Vostro meaning “your”. In this article, we will discuss the meaning and differences between these two types of bank accounts.

What is a Nostro account?

A Nostro account is a bank account that a bank holds in a foreign currency in another bank. These accounts are maintained by banks to facilitate their foreign currency transactions. Nostro accounts are used by banks to hold funds that belong to their customers in other countries. These accounts are denominated in the currency of the foreign country where the account is held. Banks use Nostro accounts to receive and make payments in foreign currencies.

For example, if Bank A in the United States has a customer who wants to make a payment to a supplier in Japan, Bank A would use its Nostro account in Japan to make the payment in Japanese yen. The funds would be transferred from the customer’s account in Bank A to Bank A’s Nostro account in Japan, and then Bank A would use these funds to make the payment to the supplier in Japan.

What is a Vostro account?

A Vostro account is a bank account that is held by a foreign bank in the local currency of the country where the account is held. Vostro accounts are maintained by banks to facilitate transactions with their international customers. These accounts are used by banks to hold funds that belong to their customers in the local currency of the country where the account is held. Banks use Vostro accounts to receive and make payments in local currencies.

For example, if Bank A in the United States has a customer who wants to receive a payment from a supplier in Japan, Bank A would give its Japanese partner bank permission to open a Vostro account with Bank A. The supplier in Japan would transfer the payment in Japanese yen to Bank A’s Vostro account in Japan. Bank A would then credit the payment to its customer’s account in the United States in US dollars.

Differences between Nostro and Vostro accounts

The main difference between Nostro and Vostro accounts is that Nostro accounts are held by a bank in a foreign country, denominated in the currency of the foreign country, and used to facilitate its transactions in that country. On the other hand, Vostro accounts are held by a foreign bank in the local currency of the country where the account is held, used to facilitate transactions with the bank’s international customers.

Another difference between Nostro and Vostro accounts is the ownership of the account. A Nostro account is owned by the bank that holds the account, while a Vostro account is owned by the foreign bank that opened the account.

A Nostro Account of one country can be a Vostro Account for another country, and vice versa

SPECIAL MENTION ACCOUNT (SMA)

Special Mention Account (SMA) is an account which is exhibiting signs of incipient stress resulting in the borrower defaulting in timely servicing of her debt obligations, though the account has not yet been classified as NPA as per the extant RBI guidelines. In 2014, the classification of Special Mention Accounts (SMA) was introduced by the RBI to identify those accounts that has the potential to become an NPA/Stressed Asset. There are three types of SMA – SMA 0, SMA1 and SMA 2. They are usually categorized in terms of duration.

SMA SUB-CATEGORIES	BASIS FOR CLASSIFICATION
SMA – 0	1-30 Days
SMA – 1	31-60 Days
SMA – 2	61-90 Days

EXAMPLE:

Assuming due date for an account as 4th day of every month (say 4th Aug, 2022):

• If the EMI/entire dues of a particular account are not received into the bank account before the day end process is run on the 4th calendar day i.e the due date, the account shall be treated as overdue after day end process. Accordingly, this account shall be classified as SMA-0. The account shall remain classifies under SMA-0 until the end of the 30^th day.
• If this account remains continuously overdue even after the completion of day end process on 30th day from the initial due date, after its classification as SMA-0, the account shall be classified as SMA-1 and shall continue to remain under this head till the 60^th day.
• Similarly, if the account continues to remains overdue even after the end of 60 days, it shall get classified as SMA-2 upon running of day end process on the 61st day from the initial due date. The maximum days to remain under SMA -2 is 90 days.

If the account remains continuously overdue for 90 days, it shall get classified as NPA (Non-Performing Asset) upon running of day end process on the 91st day from the initial due date.

NON-PERFORMING ASSETS (NPAs)

A non-performing asset (NPA) is a classification used by financial institutions for loans and advances that are in default or in arrears. In general, loans are classified as NPAs when the payment is outstanding for a period of 90 days or more, though some lenders can use shorter or longer time window in considering a loan or advance past due based on the conditions of the loan. A loan can be classified as a nonperforming asset at any point during the term of the loan or at its maturity.

Nonperforming assets (NPAs) are listed on the Balance Sheet of every bank or other financial institution. After a specified period of non-payment by the borrower, the lender will force the borrower to liquidate any assets that were pledged in the debt agreement. In case no assets were pledged, the lender may have to write-off the asset as a bad debt. He can also sell it at a discount to any collection agencies.

Nonperforming creates a significant burden on the balance sheet of the lender. The nonpayment of interest or principal reduces the lender’s cash flow, which can disrupt budgets and decrease earnings. Loss provisions created on loans are set aside to cover any potential losses which may occur, and it therefore reduced the capital available with the Banks. Once the defaulted loans are determined, the actual losses are written off against the earnings. Carrying a significant amount of NPAs on the balance sheet over a period of time is an indicator to regulators that the financial fitness of the bank is at risk.

PURPOSE OF NPAs

It is crucial for both the borrower as well as the lender to be aware of their assets whether they are performing or non-performing assets.

In case of the borrower, if the asset is a non-performing asset and interest payments are not done, it can affect their credit and growth possibilities in a negative way. It might hamper their ability to obtain any future borrowing.

In case of the bank/lender, interest earned on loans acts as a main source of income. Therefore, non-performing assets will affect their ability to generate adequate income and thus, their overall profitability. Keeping a track of NPAs is highly significant for banks since it will adversely affect their liquidity and growth abilities.

Non-performing assets would be manageable, but it depends on the amount of NPAs how many there are and how far they have stayed overdue. Most banks can take on a fair amount of NPAs in the short term. However, if the volume of NPAs continue to increase over a period of time, it threatens the financial health and future success of the lender.

TYPES OF NON-PERFORMING ASSETS (NPA)

• Term Loans, Cash Credit and Overdraft Facilities are treated as NPA if the installment of the loan, whether principal or interest, is due for more than 90 days.
• Agricultural Advances are considered as NPAs if the principal payments have stayed overdue for the specified period of time. The specified period is defined as
  • two or more crop seasons/harvest seasons for short duration crops, and
  • one crop duration for long duration crops.
• There could be other types of NPAs, including residential mortgages, home equity loans, credit card loans, non-credit card outstanding, and direct & indirect consumer loans. Expected payment on any account is overdue for more than 90 days would be classifies as NPA.

CLASSIFICATION OF NPA FOR BANKS

Classification of NPAs can be done among 3 categories:

1. Sub- Standard Assets: Sub-standard assets are those assets that have remained NPAs for a period of less than or equal to 12 months (91 days to 12 months) and the risk of the asset is normal. Risk is significantly higher as compared to Standard Assets. Banks are generally ready to take some reductions in the market value on the loan amounts categorized under this.
2. Doubtful Debts: The term ‘Doubtful Debt’ itself means that there is a very low chance of recovery of its advances/loans from the party. Doubtful assets are those assets that have remained under sub-standard NPAs for a period of more than 12 months. Such advances can put the bank’s liquidity and reputation in jeopardy.
3. Loss Assets: The final classification of non-performing assets is loss assets. This loan is identified either by the bank itself or by an external auditor/ internal auditor. The bank, in this case, has to write off the entire loan amount outstanding.