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IGPC wants banks to be allowed to buy gold, become bullion bankers

The move will enable them to source locally, finance bullion and refining business, apart from allowing them to hedge positions on exchanges and create gold-backed products

Rajesh Bhayani  |  Mumbai 

gold, jewellery

With the gold sector awaiting reforms and a completely new comprehensive policy to overhaul the business after several bouts of upheaval, two proposals are expected to form the base for the way Indians trade and deal in gold. One is the establishment of a Gold Board and other is the advent of Bullion Banks.

This is what the India Gold Policy Centre (IGPC), set up by the IIM-A recommends: “For building market infrastructure and developing liquidity in the physical market, banks that are, as of now, only importing and selling gold on industry’s behalf should grow to become bullion banks.”

Banks don’t need to set up new entities. Their divisions which are currently into bullion buying for customers, should grow and do all such activities that a bullion bank is required to do. According to the IGPC, bullion banking would enable banks to source locally, finance bullion and refining business, and finance refineries to import dore or unrefined gold. It would also allow them to hedge their positions on Indian exchanges, create gold-backed products that help reduce dollar outflows and export refined bullion.

The move could be a game changer in the way gold is dealt with in the country.

Most suggestions that have come in from other quarters have been for setting up a new bank altogether. IGPC’s recommendations, on the other hand, lean on the experience of existing banks active in bullion business, and call for growing them to deal with all bullion-related activities. The recommendation include sourcing gold locally, which banks cannot currently engane in, due to restrictions under the Banking Regulation Act.

This one permission will change the scenario, as banks then will be able to create their own trading positions in gold and even sell gold coins which they can buy back later.

IGPC stated in its 2018-19 annual report, “To develop robust bullion banking, amendments and clarifications in the Banking Regulation Act are required to enable banks to source locally, do inter-bank dealing, export bullion, transfer ounces to the counterparty international bullion bank, allow opening of unallocated accounts, trade in dematerialised gold, hedge in domestic and international exchanges and finance refiners who want to source dore.”

While many of these activities are allowed, it is equally important to create a clearing system, push through standardisation of physical gold that is to be traded, and increase vaulting infrastructure, IGPC added.

Once done, this will pave way for setting up online the gold spot exchange, for whose regulation the government is setting up a Gold Board or precious metals board.

IGPC said that the board should be an independent regulator that will oversee not just trading on the spot exchange but also to implement standardisation in gold refining and vaulting requirements, apart from introducing responsible sourcing guidelines and various investor education activities.

“The new regulator could be set up through a new act without transition provision or one with transition provision under existing the regulator or through ordinance route,” said the recommendation.

The Plan

  • Bullion banking and gold board are pre-requisite for gold reforms
  • IGPC suggests banks should bring all gold-related activities under one roof
  • Banking Regulation Act will have to be amended
  • Gold metal loans currently come at an interest rate of 2.2 - 3.5%, based on the type of collateral
  • Lenders should be able to buy yellow metal and hedge positions

First Published: Tue, July 23 2019. 14:55 IST
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