India should now allow bullion banking: WGC
The World Gold Council (WGC), which represents the metal’s mining industry, has recommended the Indian government launch bullion banking.
As of now, banks are allowed to import gold for lending. The recommendation is that banks be also allowed to buy gold and trade in it — proprietary trading, structured products and exchange-traded funds.
In a report titled, The Need for Bullion Banking in India, the Council defines a bullion bank as one which facilitates the purchase, sale and usage of standardised bullion, by offering financing, sales and trading services to participants in this market. The bank thus set up should offer purely gold-linked services like savings accounts, fixed deposits, accumulation plans, life insurance, interbank borrowing, paper gold bonds, gold monetisation schemes, gold metal loans, dore (unrefined gold) financing and loans against bullion, to name a few.
Gold banking in the world currently generates yearly revenue of $1.5-1.8 billion (2017 estimate). Revenues include interest income from financing and brokerage, and fee income from sales and trading activities.
“The launch of 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 Reserve Bank of India (RBI) should grant special licences to selected commercial banks. Bullion banking is similar to commercial banking from an operational perspective. Therefore, banks can leverage their commercial banking expertise in areas such as information technology, retail and corporate banking, sales and trading and compliance,” said Somasundaram P R, managing director of WGC’S India arm.
“The market potential for bullion banking in India has an estimated value of $300-500 million. Certain key products — gold metal loans, dore financing and brokerage and clearing services — would dominate the market, accounting for more than 80 per cent of total revenues. But, India would need to create the necessary infrastructure to allow the market to realise its potential. This includes setting up a gold spot exchange, a central clearing ecosystem and vaulting infrastructure,” goes the WGC report.
India’s gold market is one of the largest in the world but lacks organisation, structure and trust, says the report, though that is beginning to change, with numerous transformational initiatives underway. A robust bullion banking industry could support and accelerate that shift – inspiring trust, bolstering innovation and driving growth. Thus, a bullion bank would bring transparency into the business, it says.