RBI panel in favour of loaning certain part of gold ETF corpus

As large gold imports have been a cause of concern for the economy, a Reserve Bank of India (RBI) working group has suggested in its draft report that a certain part of the total corpus in gold Exchange Traded Funds (ETFs) can be ‘loaned’ to permitted categories of bulk gold importers like nominated agencies to import gold.

The draft has been published on the RBI website for reactions and suggestions. “To put the gold with Indian ETFs to productive use and reduce the demand for gold, we may think about putting a certain part of the total corpus of the fund to be ‘loaned’ to the permitted categories of bulk gold importers like nominated agencies to import gold,” said a draft report of the working group formed under the chairmanship of K U B Rao, adviser, department of economic and policy research in RBI, to study issues related to gold and gold loans by non-banking finance companies (NBFCs) in India.

In India, some importers have access to gold borrowings with pre-specified limits and they pay interest for the gold borrowed. The transaction is eventually settled by purchasing gold at the end of the tenor of the loan. Such a step would increase the returns on the ETF investments and the demand for gold imports is postponed and thereby reducing the pressure on stressed balance of payments, said the working group.
 

PANEL SUGGESTIONS ON NEW GOLD-BACKED FINANCIAL PRODUCTS

• Modified Gold Deposit Scheme - Gold taken as a deposit is recycled for meeting domestic demand and given back at the time of maturity
• Gold Accumulation Plan - A saving plan catering to even small buyers of gold
• Gold Linked Account - The entire transaction takes place outside India and import of gold is not involved
• Gold Pension Product - The customer surrenders gold to the bank on agreement to receive streams of monthly pension till his or her death

Alternatively, ETFs might also be allowed to invest their gold holdings in gold certificates with banks. If the Securities and Exchange Board of India examines these proposals, operational modalities can be worked out, said the working group.

Gold contributed nearly 30 per cent of the trade deficit during 2009-10 to 2011-12. Due to falling gold re-exports, India’s trade deficit as well as current account deficit as ratio to GDP worsened by 0.3 percentage points in 2011-12. Projections show net gold imports as a ratio to GDP are likely to be in a range of 1.8 per cent to 2.4 per cent in the next few years.

The group also suggested banks introduce new gold-backed financial products that might reduce or postpone the demand for gold imports. It believes providing a real rate of return to investors through alternative instruments holds the key to reducing the excessive demand for gold.

Meanwhile, there is also a need to increase monetisation of idle gold stocks in the economy for productive purposes. Encouraging loans against the collateral of gold for productive purposes may be a way to do this, said the group.