Why Banks Need To Enter Bullion Banking To Aid India’s Economic Stability

Recent news reports indicate that the Government is thinking of allowing banks to play a big role in gold trade. The Centre could allow banks to hold, buy, sell, hedge and leverage gold as part of their bullion business.

The move is being contemplated to make gold an asset class. Currently, banks only import gold bars for jewellers and exporters. Banks buy gold from global bullion banks such as Nova Scotia and supply it to the trade. They, however, do not take the risk of holding the metal.

World Gold Council Managing Director P R Somasundaram has been pitching for bullion banking, saying it would pave the way for developing gold infrastructure to make the yellow metal an asset class.

Experts are of the view that banks must be integrated into the whole system rather than operating as importing agents. Currently, banks are not allowed to source from domestic markets, where sometimes prices are lower than global rates.

Banks are seldom allowed to source gold from the local market, especially refiners, as they are allowed to buy only from those accredited by the London Bullion Market Association (LBMA) besides government-owned MMTC-Pamp, which has an LBMA accreditation.

As part of restructuring its gold policy, the Centre is considering to allow banks to source gold from local refiners who are accredited by the Bureau of Indian Standards and the National Accreditation Board for Testing and Calibration Laboratories.

For this purpose, an India Good Delivery standard for the country has to be developed. Government officials say that the standard is in its final stages of preparation and the Commerce Ministry would implement it. This, once approved by the Reserve Bank of India, will help banks to buy gold from accredited sellers.

Allowing bullion banking will help banks to handle risk and hold account in gold. They can also hedge their risks in gold exchanges besides taking part in spot gold exchanges.

Permitting bullion banking will be the key to making a revamped gold monetisation scheme (GMS) a success. The GMS, launched by the Centre in 2015, to tap gold idling in temples, institutions and homes, did not achieve much success since banks have been playing a passive role.

To play an active role, banks can be allowed to open metal accounts abroad in foreign currency with overseas banks that have large presence in the country. Banks need to hedge their risks since gold is price sensitive and attracts duty on import into the country.

Currently, banks in India buy gold from international suppliers paying a premium over the London Bullion Market Association. Additionally, banks charge a premium of about Rs 150 for every ounce of gold they supply. In contrast, buyers in the Gulf countries get gold at a discount - one of the reasons why smuggling of the yellow metal from the region into India is high.

The Niti Aayog is of the view that banks can get better margins by handling gold on their own, going by how some of the global banks have profited from bullion business. Banks need to have in place a proper clearing, accounting and risk management systems, according to Somasundaram, who is of the view that it would be enough if the banks set up bullion desk than go in for a separate set up.

On the other hand, there are views which also favour banks selling gold coins that have come to a halt since 2013. However, the problem with buying gold coins from banks is that they do not buy them back. Allowing bullion banking will perhaps allow banks to buy back the yellow metal.

Experts say banks should be allowed to open demat accounts for gold in ounces without any backing of physical gold. This will help satiate the investment demand appetite. In turn, investors can sell the digital gold back to the banks and get the return in rupees.

Eroll D’Souza, who teaches at Indian Institute of Management- Ahmedabad, says in his article ‘Gold Monetisation Scheme for India’ that monetising gold within the country is important for its macroeconomic stability and that it requires a credible scheme for valuing, storing and tracking the metal.

Towards this end, banks will have a major role to play in the country’s macroeconomy through bullion banking.