India should launch bullion banking to boost industry, suggests WGC

The market potential for bullion banking in India, according to the council, has an estimated value between $300 million and 500 million

Gold miners’ body World Gold Council (WGC) has recommended that the Indian government launch bullion banking by carving the niche bullion business out of the core banking system to bring in more transparency in business. The move might help unlock about $500 million in the value chain, it said.

As of now, banks import gold and lend as gold metal loans. So, bullion banking is confined to a handful of businesses. Going forward, when the government announces and implements a gold policy and introduces more reforms, including a spot exchange, banks’ role should expand to buying gold rather than only selling.

Bullion bank, according to WGC, should undertake retail rural credit, besides wholesale banking and credit. As part of corporate and institutional business, banks should also be allowed to operate on trading platforms, do proprietary trading, deal in structured products and also float exchange-traded funds, WGC suggested.

In a report titled ‘The need for bullion banking in India’, the WGC has defined the bullion bank, which facilitates the purchase, sale and usage of standardised bullion by offering financing and sales and trading services to participants in the bullion market. The bank thus set up should offer purely gold-linked services like savings account, fixed deposit, accumulation plans, life insurance, inter-bank borrowing, paper gold bonds, gold monetisation scheme, gold metal loan, dore financing and loan against bullion, to name a few.

Global gold banking currently generates a revenue of $1.5-1.8 billion a year (2017 numbers) through bullion banking operations, including interest income from financing activities, brokerage and fee income from sales and trading activities.

“The launch of bullion banking in India should follow one of two routes — either bullion banks should be structured as new entities distinct from commercial banks or the Reserve Bank of India (RBI) should grant special licences to select commercial banks. Bullion banking is similar to commercial banking from an operational perspective. Therefore, banks can leverage their commercial banking expertise in areas like information technology (IT), retail and corporate banking, sales and trading and compliance,” said Somasundaram PR, managing director, WGC (India).

“The market potential for bullion banking in India has an estimated value of between $300 million and 500 million. Certain key products — gold metal loans, dore financing and brokerage and clearing services — would dominate the market, accounting for more than 80 per cent of total revenues. But India would need to create the necessary infrastructure to allow the market to realise its potential. This includes setting up the gold spot exchange, a central clearing ecosystem and vaulting infrastructure,” said the report.

India’s gold market is one of the largest in the world, but it lacks organisation, structure and trust. But that is beginning to change now, with numerous transformational initiatives underway. A robust bullion banking industry could support and accelerate that shift, inspiring trust, bolstering innovation and driving growth.

The bullion bank would bring in transparency in bullion business in India, the report further added.