Gold bank mooted to mop up idle gold

Last Updated: Thu, Feb 07, 2013 04:29 hrs

To discourage gold imports, a Reserve Bank of India (RBI) working group has recommended setting up of a gold bank to mop up idle gold and use it productively.

The proposal for a gold bank, or the Bullion Corporation of India, was mooted in 1992 by then finance minister Manmohan Singh. That year, the draconian Gold Control Act was abolished.

RBI's working group on Wednesday recommended such a bank or corporation be assigned to act as a backstop facility to provide refinance to institutions lending against gold. The group proposed the corporation also carry out gold retailing functions, including pooling of idle gold in the system.

For this, it might be empowered with wide-ranging powers related to commercial policies on gold, it said.

It has been suggested the gold corporation buy and sell gold, issue gold bonds and collect gold stocks. The entity can also help mobilise domestic non-official gold holdings.

Though commercial banks have been allowed to mop up gold and lend it to jewellers, this has failed, as 20,000-25,000 tonnes of gold (valued at about $1 trillion) are lying idle with households and temples. Banks can accept gold deposits of at least 500 gm.

However, most gold holders say this is too high. Banks have to convert the gold into bars and store this till lending, a cumbersome process. The proposed gold bank can be allowed to handle these functions.

The working group has suggested RBI hold 51 per cent in the bank, with Rs 2,000 crore as authorised capital and Rs 1,000 crore as paid-up capital.

The remaining stake can be acquired by banks and institutions.

Independent bullion analyst Bhargav Vaidya said to ensure the plan was a success, "the minimum gold deposit amount should be reduced significantly, to the extent of one gm, and small gold holders who may not have taxable incomes and, therefore, no PAN (permanent account number) cards, should also be allowed to participate. To mop up gold from them, an agents' network is needed, similar to post office saving schemes, which can collect gold and deposit aggregate gold with the proposed bank".

Another hurdle is taxes. Octroi, value-added tax and import duty are levied on gold and the rates vary, depending on deposits and maturity periods. The issue of who would bear the cost of taxes has to be resolved.

The proposed gold bank should be vested with powers to import, buy, sell and hedge gold in the futures market in India and abroad, the RBI group recommended.

The RBI group said many gold derivative products could also be developed.

A gold bank, if set up according to the recommendations, could revolutionalise the gold business.

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