Pune: New gold-backed financial instruments, such as bank accounts and pension products linked with the precious metal, can help restrict investments in bullion and jewellery in the domestic market and check a substantial rise in imports, a central banker said.
Gold-backed products will allow investors to gain the benefits of investments in the high-yielding commodity without actually investing in the physical commodity, Subir Gokarn, deputy governor of the Reserve Bank of India (RBI), said on Sunday.
“Essentially, the role of innovation is not denying people investing in gold, but finding ways to give them gold-like qualities. That might give some solution to the larger-scale imports,” Gokarn said at a banking conference. “It (rising gold imports) is creating macroeconomic stress.”
India’s gold imports rose by 39% in the year ended 31 March, widening in part the country’s trade deficit.
“More expensive gold imports in larger quantities are adding to the stress to balance of payments,” Gokarn said.
In 2011-12, India imported gold worth $62 billion compared with $43 billion in the preceding year. Between April and June, imports stood at 181.3 tonnes, according to World Gold Council data.
India is the largest importer of gold bullion. Higher imports have pushed up the current account deficit to 4.2% of gross domestic product in the year ended 31 March.
However, imports of the precious metal is estimated to drop by around 25% from last year as buying sentiment is hit by high prices, poor liquidity, high inflation and a hike in customs duty, according to the Bombay Bullion Association, a body representing bullion traders, manufacturers and retailers.
Elaborating the central bank’s view, Gokarn said new gold-backed financial products can be in the form of modified gold deposits and gold accumulation plans, besides gold-linked accounts and pension products.
Since 1 January 2008, gold prices have surged by over 100% as investors rushed to safe assets. Noting that the high returns from gold and its hedging power from persistently high inflation have encouraged investors to buy gold, new products should encourage the dematerializing of investments or discouraging investments in physical gold, Gokarn said.
Although gold exchange-traded funds are available, they are backed by the physical commodity.
The introduction of gold-backed financial instruments could provide more choices to investors in the domestic market, besides bringing down investments in physical gold, according to D.K. Joshi, chief economist at rating agency Crisil Ltd.
“Curbing investments in physical gold will help reduce the trade deficit and thereby ease the current account deficit to an extent,” Joshi said.
Gokarn’s comments on gold-backed products to curb demand has come at a time when the central bank is formulating new rules on lending against gold in the domestic market, based on the recommendations of an expert panel headed by K.U.B. Rao.
RBI, which was initially focusing on regulating the lending against gold through non-banking financial companies (NBFCs) and commercial banks, has decided to factor in the macroeconomic concerns associated with the rise in the import of gold, Gokarn said.
The Rao panel, which submitted its report a few months ago, has made critical recommendations to encourage commercial banks and NBFCs to use tonnes of idle gold for productive purposes, while stipulating strict norms for disbursing gold loans by NBFCs. The apex bank is set to make public the recommendations for public comments soon.
Some of the recommendations of the panel could include making it mandatory for NBFCs to sign loan agreements with borrowers; and permitting commercial banks to lend against gold other than jewellery such as bars or bullion and standardizing criteria to decide lending rates and the value of gold for the purpose of calculating loan-to-value ratio. Currently this ratio is 60%. It means that for gold worth Rs.100 offered as collateral, lenders can give loans up to Rs.60.
India’s gold loan market is estimated at around Rs.3.5 trillion. Commercial banks and NBFCs together account for Rs.1.5 trillion and moneylenders make up the rest, according to the Association of Gold Loan Companies, an industry lobby.
Traditionally, the Indian gold loan market has been dominated by NBFCs promoted by family business groups such as Muthoot Finance Ltd, Manappuram Finance Ltd and Muthoot Fincorp Ltd. The first two are listed entities.
Muthoot Finance, the largest among the gold loan lenders, had a loan book of Rs.23,439.6 crore at the end of September, and Manappuram Finance Rs.10,738 crore at the end of June. Muthoot Fincorp, which is relatively smaller, had a loan book of Rs.7,200 crore in March.
Concerned over the sharp rise in the growth of gold loan companies, the Indian central bank has been tightening norms for NBFCs lending against gold first in February 2011 by removing the priority sector tag to such loans that banks used to give to NBFCs for on-lending, thus pushing up the cost of money for such companies.
Subsequently, in March, RBI capped the amount NBFCs can lend against gold at 60%. This was followed by capping banks’ exposure to single gold loan NBFCs from 10% to 7.5% of their capital base. Commercial banks were also asked to set an internal ceiling for overall exposure to gold loan NBFCs. Further strengthening its rules, in October RBI barred banks from financing the purchase of gold in any form other than working capital finance.