The government will allow banks to do bullion business — to hold, buy, sell, hedge and leverage gold. This will facilitate intervention of banks in developing bullion as an asset class.
As per the current norms, banks can only be a consignment or channelising agent in the import of bullion for jewellers and exporters. They route the gold from international bullion banks like Nova Scotia and supply it to the trade, without taking the risk of holding the metal.
“Allowing bullion banking will be a main step towards developing gold infrastructure in India and establishing gold as an asset class. Once bullion banking is allowed, banks can handle bullion risk, hold gold account, hedge and take active part in the proposed gold spot exchange,” said PR Somasundaram, MD, India, World Gold Council.
According to him, one of the main barriers working against the successful implementation of Gold Monetisation Scheme is the inability of banks to take the risk of holding gold. Bullion banking will not just promote Gold Monetisation Scheme, it will also augment the proposed bullion spot exchange and support better price discovery.
The Niti Aayog, in its recommendations on Gold Policy, has also asked RBI to ensure greater participation by the banks to enter the gold business for better price discovery and availability of gold. The international suppliers sell gold to the Indian banks for a price which includes a premium over and above the LBMA price. In addition, the banks charge a premium in the range of $2.2–$2.3 per ounce. In markets such as the UAE, gold is procured at a discount from the LBMA quoted prices.
Banks can have better margins by handling gold by themselves. Most of the international bullion banks are profitable entities. For banks to get into bullion banking, they need clearing system, metal accounting system and risk management systems, said Somasundaram. Separate bullion banks need not be set up; instead some of the banks can have bullion desks to handle the commodity.
“In the next two to three months, we expect an announcement in this regard. The work is already in progress and the modalities required for the implementation of the same are being discussed and finalised,” he added.