Amid speculation of a fresh government crackdown on gold holdings, the World Gold Council (WGC) has suggested the Centre allow setting up of bullion banks to trade or facilitate trading in gold or its derivatives. This will promote exports, ease credit flow and bring in further transparency in the broader gems and jewellery sector.
In a report titled 'The need for Bullion Banking in India', the WGC has recommended that banks or similar institutions be given flexibility to launch gold-backed products, with appropriate checks and balances. The report has been submitted with the government, which has been planning to come out with a broad gold policy.
The suggestions come amid media reports that the government will bring about a likely gold amnesty scheme under which people could be allowed to come clean on investment made in the bullion using black money by declaring their exact holding and paying tax on it.
When asked, WGC managing director (India) Somasundaram PR termed the reports as "speculative".
However, he stressed that merely announcing any such scheme without coming out with a comprehensive policy framework to treat gold as an asset class is unlikely to work in a country like India where the bullion has had a vast appeal on cross-sections of people traditionally.
Typically, a bullion bank facilitates the purchase, sale and use of standardised bullion or bullion-based derivatives. Similar to commercial banks, bullion banks provide a range of products and services, centred around deposits, advances, sales and trading. Customers span the bullion value-chain, including central banks, miners, refiners, jewellers and investors, both retail and institutional.
According to the report, bullion banking in India should follow one of two routes: Either bullion banks should be structured as new entities distinct from commercial banks or the RBI should grant special licences to selected commercial banks.
Somasundaram said the central bank should allow banks to buy back bullion that they sell. Similarly, jewellers should be pemitted to take bullion on loan from banks and repay it in gold as well. This will also remove any sort of currency risk. Large domestic recycling of gold will also reduce imports while greater exports will earn foreign exchanges for the country.
Similarly, with adequate incentives and good infrastructure, banks can manage the gold monetisation scheme well and reduce the reliance on imports. As for bullion banks, they can manage several risks, including credit, liquidity, interest rate mismatch, market and operational risks.
The report says the Indian gold market faces multiple challenges such as lack of quality assurance, an unorganised state of the market and weak positioning in international markets. "Bullion banking is one of the key pillars to address these challenges...."
Countries such as the US, UK, China and Switzerland have fully functional, well organised bullion markets. A large, diversified bullion bank typically has a balance sheet of $8-10 billion, with a return on capital employed of around 10%, as per the report. Revenues for bullion banking operations usually include interest income from financing activities, and brokerage and fee income from sales and trading activities.
In 2017, the revenue from global bullion banking operations was estimated at $1.5-1.8 billion. Greater China made up for 30-40% of the global revenues and the top five banks accounted for 70% of the global revenues.