A working group set up by the Reserve Bank of India (RBI), on Wednesday, suggested banks to increase their gold jewellery loans portfolio to curb large imports of gold, which is widening the current account deficit (CAD).
The working group was set up to study issues related to gold imports and gold loans provided by non-banking finance companies (NBFCs).
“This greatly facilitates monetisation of huge stocks of gold. Given the superior quality of gold as collateral, the prudential norms like risk weights and provisioning on gold loans may be softer than other loans,” it said in its final report.
This move would also reduce reliance of economically weaker sections of the society on money lenders and pawn brokers.
“There is a need to moderate the demand for gold imports considering its impact on the current account deficit,” the report said. The working group proposed a combination of measures to pare demand, manage supply and increase monetisation of idle gold stocks . CAD increased to a record high of 5.4 per cent during the second quarter of the current financial year as compared to 4.2 per cent in the corresponding period in the previous fiscal.
The working group proposed the setting up of ‘Bullion Corporation of India’ (BCI), as a backstop facility, to provide refinance to institutions lending against the collateral of gold, and also to undertake retailing functions in gold, including pooling of idle gold, in the system.
“If BCI is established in India, it would facilitate the activation of idle domestic gold and thereby reduce gold imports,” it pointed out.
On the other extreme, the gold corporation could be empowered with wide-ranging activities related to the entire spectrum of commercial policies related to gold. The corporation could make purchases and sales of gold and issue gold bonds and collect the gold stocks, it added.
Gold Bank
The idea of a Gold Bank was mooted by the then Finance Minister, Manmohan Singh, in his budget speech in 1992. However, the proposal was not implemented. The group suggested that the gold bank could be given powers to import, export, trade, lend and borrow gold and deal in gold derivatives. “Its role should be that of intermediary in gold transactions, providing liquidity to holders of gold and gold loan providers,” it added.
The proposed BCI could also play a major role in recycling and pooling of domestic scrap gold, which comes to nearly 300 tonnes per annum.
The group suggested the government to give in-built tax incentives for Gold Bonds and Gold Deposits schemes. “The impounded gold through gold bonds can be used to reduce the demand for gold imports. There can be a lock-in period.
This would impound domestic gold in various forms, such as jewels, ornaments and coins,” it said.
It also wanted the government to align gold import regulations with the rest of imports as gold imports were getting a preferential and favourable treatment compared to import of any other item. “This will take away significant incentives to gold imports, and will go a long way towards reducing gold imports,” it pointed out.
Reiterating its earlier proposal, the group proposed to explicitly prohibit banks from extending advances for purchase of gold bullion, primary gold, jewellery, coins, ingots, Gold ETF and gold MF units with the exception of providing working capital finance to jewellers. However, the working group felt that there need not be any curb or limits on advances against gold jewellery and gold coins for productive purposes.
It proposed more gold-backed products to unlock the hidden economic value in idle gold stocks. To begin with, the group suggested products such as Gold Accumulation Plan, Gold-Linked Account, Modified Gold Deposit and Gold Pension Product.
“Banks may also be permitted to issue gold bonds for terms longer than 10 years in the same way as gold deposits. Banks may also be permitted to lend against these gold deposits / bonds, and also buy back such gold deposits from the public,” the report said.
