Banking on gold for a glittering future
5 Oct 2014 9:02 PM GMT
All that glitters is not gold,’ goes one of the many sayings kicked off by this precious metal – which contrarily has seen gold-diggers of yore to today’s bullion barons shining in its golden limelight and now dominates the world financial markets as being the basis of any country’s currency strength.
One of the biggest gold consumers in the world – INDIA – is in the limelight with its golden assets being sought to be brought into the open market from its present places of idle rest in temples, homes and other places where it is simply gathering dust without any monetary benefits for its owners, according to businesshouses and financial institutions.
Describing gold monetisation as a serious topic as it connects refineries, dealers and customers who have to part with their gold Foretell Business Solutions President G Srivatsava said the industry is grappling with the question about who is responsible for it. ‘We need a nodal agency to go into this regard as there is no clarity. This gap is a big opportunity for parallel sectors which take illegal advantage of this,’ he said.
‘Indian imports of gold have increased from $3 billion in 2002 to $10 billion in mid-2000 and then to between $51 billion to $52 billion in 2013. However, sadly, illegal imports of this precious yellow metal too have increased alongside the legal imports as this is a hugely-lucrative business for smugglers’, he said.
‘NRIs were allowed to bring in as much as five kgs of gold. Then others too got to import gold (from 1996); besides the gold deposit scheme in 1999; and gold being permitted for trading in 2003. The first decade of the 21st century was a remarkable time for gold changes from 1993 to 2010 with a clear roadmap for India moving from everyday account to convertibility.’
Srivatsava said the first decade of the new millennium witnessed tremendous reforms, but after 2011, the government felt compelled to take certain measures like increased import duty, 80-20 import-exports etc, that however led to a surge in smuggling activities. According to the World Gold Council (WGC) data, about 200 tonnes of gold worth Rs 250 crores is being smuggled into India every year, but the 10 per cent duty by the government had partly reduced this problem, he said.
‘It took 20 years of baby steps by the government move in the right direction, kill the hawala trade and stop this smuggling problem, which sadly has reversed now in barely one year. In the last one year, gold imports have come down by 30 per cent and we are at a critical stage as to what needs to be done. Today the situation is that the government demands 20 per cent of imported gold to be exported – with the remaining 80 per cent for consumption in India,’ he said, adding ‘The gold industry import model is not good for us. The WGC says India has 20,000 tonnes of gold and should take it out and use it in the gold monetisation system.’
MMTC PAMP MD Rajesh Khosla said ‘Gold is in our DNA and integral to us, yet there is only a limited amount of currency that government believes can be spent for gold. India’s consumption is 900 tonnes per year, though – in a bad year – it comes down down to 200 tonnes. The question here is how to fill this gap, since the biggest resource for gold is in India itself.’
Elaborating on this question, he said around 25,000 tonnes of gold lay in Indian households and this could be used to address the shortfall. ‘In 1999, the government came out with the gold deposit scheme – which was tailored to suit the convenience of banks. However, it is a crying shame that the total amount — less than 15 tonnes— could only be monetised during the period 1999 to 2014, which amounted to barely one tonne gold per annum,’ he said.
He said the solution lay in keeping gold in banks. ‘If we treat gold like rupee-saving-accounts, one can earn upto 4 per cent interest. We need to address gold in this manner. Forget 500 grams minimum gold deposit and instead look at having even barely 40 grams gold minimum deposit in the banks through parallel accounts alongside the existing rupee accounts.’
‘But your gold needs to be assuaged, melted and then put into deposit. So you need to do this within 45 minutes at a proper place where you can see it being melted in the process. We (MMTC PAMP) are an international refinery serving all including banks. So you have the flexibility to manage your gold like your bank rupees, while such banks can earn money on the gold by pledging it through the Reserve Bank of India which in turn ensures liquidity release.’
‘So if we are addressing about two or three million such account-holders, software support will be needed to handle all this business. We are presently having dialogue with banks as to how this can be made to work. About 1.8 tonnes of gold is there in Tirupati temple, but it is a drop in the ocean compared to the country’s need which can be met by the 40 grams gold owners, who number about 90 per cent of gold-owning population in India.
A suitable scheme should be tailored to suit this population of the country as this is a solution — in the country’s desperate need to address the gold demand-supply gap – that will ensure bringing gold into circulation and into the country’s economy.’
‘Banks understand how to manage money – but not gold. So our discussion with them focuses on: addressing the concerns of the gold industry and highlighting the points of the related scheme to be successful. There is not enough money with the Ministry of Finance for meeting the country’s insatiable appetite for gold, which can be however be addressed through a) unconventional means, and b) go to our population (we are addressing here 250 tonnes per year, and increasing by 1,000 tonnes per annum). There are more marriages taking place and we need to make this scheme user-friendly by reaching out to people as this won’t happen overnight.’
‘Every household may have some broken gold bangle, or a damaged gold chain or some other jewelry that just sits in the locker. Some people have the odd gold coin (4 grams, 8 grams etc.) All this gold would be better off sitting in a bank than a home. However, the ultimate consumer of gold is the jeweler — not you and me — as these people have more jewellery shops than banks in India.’ ‘There have been informal discussions with the concerned stakeholders and we now need to refine it to a level where we also look at issues like: tax, VAT, CST that have to be addressed at the industry forum,’ Khosla added.
Pradeep Nagouri, Associate Director, Edelweiss Metals Limited, said there is a huge amount of gold
lying in temples etc – which is a dead investment that is not coming in the system. ‘If we can get part of that 20,000 tonnes gold back into the system, then the import-related problems will be resolved. However, the main issues are: policy measures; how schemes can be made more workable with clarity; how temple gold can be brought to banks; need for Indian professionally-run gold-refinery organisations that can work to international standards,’ he said.
To a question about how important exchanges are for the bullion market, P K Singhal, Executive Vice-President, MCX, said 2013 had been a challenging year for gold with the dampener being the various state governments stamp duty, which affected the hedging mechanism in India. ‘But one positive factor is the MCX Exchange – which is the number one such exchange in India – with people still having confidence in it and 3.26 lakh clients trading in bullion on it. However, temple gold is lying idle due to lack of hedging mechanism and FCR not being passed, as a result of which hedging is seriously hampered,’ he said, adding ‘We are hoping 2015 will be a good year for gold and gold hedging instruments.’
Meanwhile, at the inaugural function of the 11th India International Gold Convention (IIGC) held recently, Peruvian Ambassador to India Javier Paulinich announced that India and Peru were close to finalising a Free Trade Agreement soon. The three-day bullion industry event witnessed over 480 delegates in attendance.
Inaugurating the gold convention, Paulinich said that in 2012, India imported gold from Peru worth $160 million and — in just a year in 2013 — the import increased to $260 million. ‘This drastic increase in imports signifies that India is serious about cementing the relationship with Peru and we would like to invite Indian refineries to invest in Peru as part of the growing relations between the two countries,’ he said, adding ‘India is a country that loves Gold and Peru is the 6th largest exporter of Gold in the world. So it is a win- win situation for both the countries.’
The event witnessed attendance of global heads of various bullion banks, refiners and exchanges along with stalwarts of the bullion industry from across the globe. On the sidelines of the gold convention, the industry players discussed the issues on dismantling the 80/20 rule, reduction in customs duty, provisions of the gold deposit scheme, institutional mechanisms, need for a nodal agency for bullion and relaxing the gold import norms for NRIs.
‘This convention is a step towards bringing the key issues to the notice of the government,’ observed G Srivatsava, while emphasising that the government must dismantle 80/20 rule and replace it with a simpler quantitative restriction.
‘A simpler approach could be to set an annual target for gold import based on growth of the economy, deficit tolerance and metal needs. The annual target can be broken down into monthly targets based on demand cycle, export commitments and so on,’ he said, adding ‘The nominated agencies can be given quotas based on past performance criteria and distribution efficiency. Such a model is being successfully practiced in China. It would make supply chain efficient and bring down transaction costs.’
The industry players reiterated their stand on gold deposit account achemes and have emphasised that the provision of these schemes be made more inclusive, attractive, transparent and user-friendly.
MMTC-PAMP Managing Director Rajesh Khosla said ‘Gold deposit schemes are one of the best opportunities for India to arrive at a sustainable long-term solution. Current provisions of GDS need to be revised in terms of minimum quantity deposited, inclusion of jewelers, transparency in ascertaining the gold content and issue of certificate, lock-in period and interest rate on gold deposits. A proper and attractive gold deposit scheme would help mobilise about 200 to 250 tonnes of gold annually and greatly relieve the pressure on foreign exchange.’
Edelweiss Financial Services Limited Executive Director Rujan Panjwani said, ‘It is difficult to imagine the demand for gold will abate anytime soon here as people look upon it as safe investment. We can, however, strive to create regulatory and structural framework to encourage pooling of gold through banks to ensure its circulation in the economy. However, it will be important to incentivise monetisation and financialisation of gold by making it attractive for all stake holders.’
The convention dwelt upon topics like: Movement of gold (standard, jewellery, dore and scrap) within India, learning from Chinese experience of securing dore, gold saving schemes, changing global bullion market landscape and relevance of India; roadmap for Indian bullion industry for next 10 years, engaging with overseas partners, representation to the government; market, products and portfolio – new paradign and new opportunity, and price outlook on gold and silver.
The various speakers said that at present, policies and procedures related to bullion are handled by at least five agencies — Department of Economic Affairs (DEA), Reserve Bank of India, Directorate General of Foreign Trade, Central Board of Excise and Customs, and Directorate General of
Export Promotion (DGEP). Noting that it is difficult to identify the right agency and address the grievance, the convention requested that government consider setting up a nodal agency for bullion, which can seek suggestions on policy matters from IBA, Assocham, nominated agencies and associations such as IBJA and Bullion Development Federation.
One of the biggest gold consumers in the world – INDIA – is in the limelight with its golden assets being sought to be brought into the open market from its present places of idle rest in temples, homes and other places where it is simply gathering dust without any monetary benefits for its owners, according to businesshouses and financial institutions.
Describing gold monetisation as a serious topic as it connects refineries, dealers and customers who have to part with their gold Foretell Business Solutions President G Srivatsava said the industry is grappling with the question about who is responsible for it. ‘We need a nodal agency to go into this regard as there is no clarity. This gap is a big opportunity for parallel sectors which take illegal advantage of this,’ he said.
‘Indian imports of gold have increased from $3 billion in 2002 to $10 billion in mid-2000 and then to between $51 billion to $52 billion in 2013. However, sadly, illegal imports of this precious yellow metal too have increased alongside the legal imports as this is a hugely-lucrative business for smugglers’, he said.
‘NRIs were allowed to bring in as much as five kgs of gold. Then others too got to import gold (from 1996); besides the gold deposit scheme in 1999; and gold being permitted for trading in 2003. The first decade of the 21st century was a remarkable time for gold changes from 1993 to 2010 with a clear roadmap for India moving from everyday account to convertibility.’
Srivatsava said the first decade of the new millennium witnessed tremendous reforms, but after 2011, the government felt compelled to take certain measures like increased import duty, 80-20 import-exports etc, that however led to a surge in smuggling activities. According to the World Gold Council (WGC) data, about 200 tonnes of gold worth Rs 250 crores is being smuggled into India every year, but the 10 per cent duty by the government had partly reduced this problem, he said.
‘It took 20 years of baby steps by the government move in the right direction, kill the hawala trade and stop this smuggling problem, which sadly has reversed now in barely one year. In the last one year, gold imports have come down by 30 per cent and we are at a critical stage as to what needs to be done. Today the situation is that the government demands 20 per cent of imported gold to be exported – with the remaining 80 per cent for consumption in India,’ he said, adding ‘The gold industry import model is not good for us. The WGC says India has 20,000 tonnes of gold and should take it out and use it in the gold monetisation system.’
MMTC PAMP MD Rajesh Khosla said ‘Gold is in our DNA and integral to us, yet there is only a limited amount of currency that government believes can be spent for gold. India’s consumption is 900 tonnes per year, though – in a bad year – it comes down down to 200 tonnes. The question here is how to fill this gap, since the biggest resource for gold is in India itself.’
Elaborating on this question, he said around 25,000 tonnes of gold lay in Indian households and this could be used to address the shortfall. ‘In 1999, the government came out with the gold deposit scheme – which was tailored to suit the convenience of banks. However, it is a crying shame that the total amount — less than 15 tonnes— could only be monetised during the period 1999 to 2014, which amounted to barely one tonne gold per annum,’ he said.
He said the solution lay in keeping gold in banks. ‘If we treat gold like rupee-saving-accounts, one can earn upto 4 per cent interest. We need to address gold in this manner. Forget 500 grams minimum gold deposit and instead look at having even barely 40 grams gold minimum deposit in the banks through parallel accounts alongside the existing rupee accounts.’
‘But your gold needs to be assuaged, melted and then put into deposit. So you need to do this within 45 minutes at a proper place where you can see it being melted in the process. We (MMTC PAMP) are an international refinery serving all including banks. So you have the flexibility to manage your gold like your bank rupees, while such banks can earn money on the gold by pledging it through the Reserve Bank of India which in turn ensures liquidity release.’
‘So if we are addressing about two or three million such account-holders, software support will be needed to handle all this business. We are presently having dialogue with banks as to how this can be made to work. About 1.8 tonnes of gold is there in Tirupati temple, but it is a drop in the ocean compared to the country’s need which can be met by the 40 grams gold owners, who number about 90 per cent of gold-owning population in India.
A suitable scheme should be tailored to suit this population of the country as this is a solution — in the country’s desperate need to address the gold demand-supply gap – that will ensure bringing gold into circulation and into the country’s economy.’
‘Banks understand how to manage money – but not gold. So our discussion with them focuses on: addressing the concerns of the gold industry and highlighting the points of the related scheme to be successful. There is not enough money with the Ministry of Finance for meeting the country’s insatiable appetite for gold, which can be however be addressed through a) unconventional means, and b) go to our population (we are addressing here 250 tonnes per year, and increasing by 1,000 tonnes per annum). There are more marriages taking place and we need to make this scheme user-friendly by reaching out to people as this won’t happen overnight.’
‘Every household may have some broken gold bangle, or a damaged gold chain or some other jewelry that just sits in the locker. Some people have the odd gold coin (4 grams, 8 grams etc.) All this gold would be better off sitting in a bank than a home. However, the ultimate consumer of gold is the jeweler — not you and me — as these people have more jewellery shops than banks in India.’ ‘There have been informal discussions with the concerned stakeholders and we now need to refine it to a level where we also look at issues like: tax, VAT, CST that have to be addressed at the industry forum,’ Khosla added.
Pradeep Nagouri, Associate Director, Edelweiss Metals Limited, said there is a huge amount of gold
lying in temples etc – which is a dead investment that is not coming in the system. ‘If we can get part of that 20,000 tonnes gold back into the system, then the import-related problems will be resolved. However, the main issues are: policy measures; how schemes can be made more workable with clarity; how temple gold can be brought to banks; need for Indian professionally-run gold-refinery organisations that can work to international standards,’ he said.
To a question about how important exchanges are for the bullion market, P K Singhal, Executive Vice-President, MCX, said 2013 had been a challenging year for gold with the dampener being the various state governments stamp duty, which affected the hedging mechanism in India. ‘But one positive factor is the MCX Exchange – which is the number one such exchange in India – with people still having confidence in it and 3.26 lakh clients trading in bullion on it. However, temple gold is lying idle due to lack of hedging mechanism and FCR not being passed, as a result of which hedging is seriously hampered,’ he said, adding ‘We are hoping 2015 will be a good year for gold and gold hedging instruments.’
Meanwhile, at the inaugural function of the 11th India International Gold Convention (IIGC) held recently, Peruvian Ambassador to India Javier Paulinich announced that India and Peru were close to finalising a Free Trade Agreement soon. The three-day bullion industry event witnessed over 480 delegates in attendance.
Inaugurating the gold convention, Paulinich said that in 2012, India imported gold from Peru worth $160 million and — in just a year in 2013 — the import increased to $260 million. ‘This drastic increase in imports signifies that India is serious about cementing the relationship with Peru and we would like to invite Indian refineries to invest in Peru as part of the growing relations between the two countries,’ he said, adding ‘India is a country that loves Gold and Peru is the 6th largest exporter of Gold in the world. So it is a win- win situation for both the countries.’
The event witnessed attendance of global heads of various bullion banks, refiners and exchanges along with stalwarts of the bullion industry from across the globe. On the sidelines of the gold convention, the industry players discussed the issues on dismantling the 80/20 rule, reduction in customs duty, provisions of the gold deposit scheme, institutional mechanisms, need for a nodal agency for bullion and relaxing the gold import norms for NRIs.
‘This convention is a step towards bringing the key issues to the notice of the government,’ observed G Srivatsava, while emphasising that the government must dismantle 80/20 rule and replace it with a simpler quantitative restriction.
‘A simpler approach could be to set an annual target for gold import based on growth of the economy, deficit tolerance and metal needs. The annual target can be broken down into monthly targets based on demand cycle, export commitments and so on,’ he said, adding ‘The nominated agencies can be given quotas based on past performance criteria and distribution efficiency. Such a model is being successfully practiced in China. It would make supply chain efficient and bring down transaction costs.’
The industry players reiterated their stand on gold deposit account achemes and have emphasised that the provision of these schemes be made more inclusive, attractive, transparent and user-friendly.
MMTC-PAMP Managing Director Rajesh Khosla said ‘Gold deposit schemes are one of the best opportunities for India to arrive at a sustainable long-term solution. Current provisions of GDS need to be revised in terms of minimum quantity deposited, inclusion of jewelers, transparency in ascertaining the gold content and issue of certificate, lock-in period and interest rate on gold deposits. A proper and attractive gold deposit scheme would help mobilise about 200 to 250 tonnes of gold annually and greatly relieve the pressure on foreign exchange.’
Edelweiss Financial Services Limited Executive Director Rujan Panjwani said, ‘It is difficult to imagine the demand for gold will abate anytime soon here as people look upon it as safe investment. We can, however, strive to create regulatory and structural framework to encourage pooling of gold through banks to ensure its circulation in the economy. However, it will be important to incentivise monetisation and financialisation of gold by making it attractive for all stake holders.’
The convention dwelt upon topics like: Movement of gold (standard, jewellery, dore and scrap) within India, learning from Chinese experience of securing dore, gold saving schemes, changing global bullion market landscape and relevance of India; roadmap for Indian bullion industry for next 10 years, engaging with overseas partners, representation to the government; market, products and portfolio – new paradign and new opportunity, and price outlook on gold and silver.
The various speakers said that at present, policies and procedures related to bullion are handled by at least five agencies — Department of Economic Affairs (DEA), Reserve Bank of India, Directorate General of Foreign Trade, Central Board of Excise and Customs, and Directorate General of
Export Promotion (DGEP). Noting that it is difficult to identify the right agency and address the grievance, the convention requested that government consider setting up a nodal agency for bullion, which can seek suggestions on policy matters from IBA, Assocham, nominated agencies and associations such as IBJA and Bullion Development Federation.
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