New Delhi: Apex industry body ASSOCHAM has mooted a proposal to the Finance Minister for setting up of Gold Bank and introduction of Gold Deposit Account (GDA) operated through scheduled commercial banks (SCBs) to minimize the smuggling of gold.
The Chamber President Mr. Rana Kapoor said, “the Gold Bank would procure and retain gold abroad through offshore foreign currency borrowing. Using this gold backing from the Gold Bank, scheduled commercial banks can offer Gold Deposit Account to its retail customers and the Finance Minister could consider announcing it with the Budget”.
The Gold Deposit Account (GDA), which will carry most of the features of a savings bank account, is conceptually different from the initiatives taken earlier to mobilize gold in the economy. It will have the option of being funded by currency deposit (INR) as well as by non-jewellery physical gold from the customer. Hence it will help in financializing both the incremental demand for gold as well as the existing stock of non-jewellery physical gold within India, said Mr. Kapoor.
The GDA will represent notional units of gold and provide gold price return in weight terms, which will be a deterrent to retail demand for physical gold. This has the potential to defer the need for import of physical gold.
The ASSOCHAM chief further said given the inherent cultural appetite for gold in India along with its feature of being a natural hedge against inflation, the efficacy of administrative measures, beyond a threshold, could get diluted. Policy effort should, therefore, be towards incentivizing residents to defer the procurement of physical gold, which in turn, would defer gold imports to an extent possible.
Significant part of procurement of retail gold happens in India because of its properties like (i) inflation-hedge, and (ii) store of value. As such a large part of current procurement is an effort towards locking in gold at the current price. In some cases like marriage, retirement, etc., the actual need for physical gold is often significant years away in the future.
Since the returns on the GDS will mirror gold price returns, it will be a deterrent to retail demand for physical gold, where the sole purpose of procurement is to lock in the current price for some personal use in future. As such, GDA can potentially defer the need for import of physical gold.
The GDA in its proposed form, the chamber said will be funded by both currency deposit (INR) as well as existing non-jewellery form of retail gold (hallmark coins and bars up to 100 grams) by the customer vis-à-vis earlier attempts, where only physical gold was used for funding. In this process, the proposed GDA aims to financialise the incremental demand for gold as well as the existing stock of physical gold within the country. The GDA does not cover gold in jewellery form due non-standardization in quality and substantial ‘making charge’ in the price component.
Mr. Kapoor sadi, after a bank creates GDA for its customer, the physical gold collected from the customer is exported after maintaining adequate inventory. The Bank in return, credits the customer’s account with units of gold, which reflects price returns overtime through the channel of Participation Certificate issued by the GB. The Participation Certificate can be acquired by the bank after it converts its export receivables from gold and deposits the INR equivalent with the Gold Bank.
ASSOCHAM feels, the INR deposit received by the GB from domestic scheduled commercial banks (SCBs) can be used to buy GoI securities, which need not be marked to market. The INR investment in GoI securities can be can be used to offset the USD interest liability. Any change in price of gold will trigger an equivalent change in the GB’s liability through its Participation Certificate with the domestic SCB. As such, the gold price risk is naturally hedged within GB’s balance sheet.
The notional units of gold under the GDA with the bank can qualify for SLR status as per the Banking Regulation Act, 1949. The notional gold can be valued at the existing price on reporting Friday for calculation of SLR. The SLR status of the GDA with banks would be crucial as this is the only channel through which banks can increase their lendable resources. The income which the bank generates through SLR status of the GDA can be used to pay a nominal interest to the holder of GDA. This nominal rate of interest can be deregulated by the RBI.