Developing Infrastructures in the Gold
Value Chain
Nirupama Soundararajan & Arindam Goswami Pahle India Foundation
The first step
to a comprehensive gold policy is to define gold. The next step is to
concentrate on upscaling existing infrastructure and creating new
infrastructure to support the gold ecosystem. The gold value chain in India can
be divided into three broad heads - procurement (which involves lease and
financing), domestic trading, and storage and distribution. Currently, the
leasing and financing avenues for gold business are limited, trading is primarily
carried outside the formal financial system, and storage and distributary networks
are mostly rickety. Hence to create a robust gold ecosystem in the country, it
is important that the troika of procurement, trade and storage be developed and
are at their functional best.
Since India has
traditionally been an import dependent economy when it comes to gold, one of the
major challenges has been procurement. Currently, gold is imported by nominated
banks and nominated agencies, although majority of the import business is
concentrated amongst banks. Besides import, banks also finance the gold
business through GML, trade financing, and working capital requirements. Despite
the key role that banks play in the trade of gold, they do not consider gold as
their mainstay business. Infact banks consider gold to be a burden on their
core banking activities. Banks are apprehensive (or even averse in many cases)
to doing business in gold for broadly two reasons. First, they are wary of the
lack of transparency in the business, particularly since most of the gold
business is conducted over the counter. Second, many have confessed that they
lack the necessary expertise and proficiency to carry out gold business. Hence,
our first recommendation is that RBI allows for a special category of banks
known as “bullion banks” to be set up in India under the differentiated banking
licence. We also recommend that these bullion bank licences are not restricted
to existing commercial banks alone, but are also extended to other financial sector
participants who understand the gold business. Bullion banks are a tried and
tested method of banking, commonly followed internationally. India can follow
suit and set up this part of the financial infrastructure that can undertake activities
such as buying, selling, leasing, financing, re-financing, bullion investment,
and several monetisation schemes.
While bullion
banks will help bring transparency in gold procurement, it will not necessarily
help in reducing the OTC trade. This means that most of the trade is kept out
of the formal financial system with significant variations in the price and
quality of gold across channels and points of sales. Global experiences show
that setting up a bullion spot exchange can align the business of gold with
that of financial market. A spot exchange can further help in reducing
disparity in price and quality. Two prominent examples are that of China and
Turkey which successfully manged to streamline their gold business by setting
up spot exchanges. The announcement for setting up of a Gold Spot Exchange has
already been made in the Union Budget of 2018-19. What remains is for a
comprehensive regulatory framework for a spot exchange to be set up.
A recent committee
under the Chairmanship of Prof. Ramesh Chand, on the integration of spot and
future markets has recommended that the gold spot exchange be regulated by
SEBI. While SEBI may seem like an appropriate choice, we believe that SEBI does
not have the necessary wherewithal to deal with spot transactions. We recommend that the gold spot exchange be
set up under a separate statutory act and under a separate regulator (a Gold
Board) with appropriate directives and guidelines for undertaking spot trading.
Any spot exchange and its regulatory framework must be befitting of the size of
the gold market and the number of prospective participants on the exchange.
Such an exchange will integrate the market, enhance transparency in pricing,
improve standardisation in quality, and most importantly create a separate
mechanism for trading bullion differently from agricultural products.
Having planned
for suitable infrastructure for procurement and trading of gold, one naturally
turns to storage of gold. At present, bullion vaulting in India is not quite
regulated. Recently, SEBI has directed the commodity derivatives exchanges
trading in bullion to register vaults used by them and adhere to basic vaulting
guidelines. Although this is a smart move by SEBI to ensure standards in
vaulting, in the absence of any real regulatory authority and rigid compliance
mechanism, these frameworks are only ‘second best’ alternatives when compared
to international vaulting standards. Moreover, this surrogate regulatory system
extends only up to vaults under exchanges but fails to govern those used by
banks, bullion depositing NBFCs, asset management companies and other financial
institutions dealing in bullion.
Currently,
warehousing in India is regulated by the Warehouse Development and Regulatory
Authority of India (WDRAI), but is limited to the accreditation and oversight
of only notified agricultural and horticultural commodities, and only those
that wish to issue warehouse trading receipts. Warehousing,
or vaulting of gold cannot be dealt with similarly. Vaults are an integral part
of the financial chain. Hence, we recommend that WDRAI extends its regulatory
outreach to vaults storing gold and other precious metals. This single move is
expected to benefit the entire gold ecosystem as it will ensure supply of
standardised gold in the country. We also recommend that unlike for
agricultural and horticultural commodities, accreditation of all gold vaults
must be made compulsory. Gold vaults
will also lay the foundation for digital gold.
Disclaimer:
Views are personal and not the views of the publisher.