A working group set up by the Reserve Bank of India (RBI) to look into the systemic effects of large gold imports into the country as also the recent trends in gold loans extended by large gold loan NBFCs has suggested measures to moderate demand for gold imports considering its impact on the current account deficit.
The working group has suggested fiscal measures to reduce the gold imports.
Also, it said banks should design innovative financial instruments that can provide real returns to investors so as to detract investors from gold.
''There is a need to convert both rural and urban demand for gold into investment in gold-backed financial instruments through dematerialisation of gold,'' according to the group.
Besides it has suggested:
- Introduction of tax incentives on instruments that can impound idle gold;
- Recycling of scrap to satisfy domestic need;
- Setting limits on the volume and value of gold to be imported by banks;
- Imposing export obligation on bulk gold importers;
- Expansion of banks' gold jewellery loan portfolio to monetise the stocks of idle gold;
- Considering setting up of a gold bank;
- Banks continuing their role as nominated agencies in gold imports;
- Differential pricing of banking services and finance for gold imports;
- Prohibiting bank finance to purchases of gold bullion;
- Lifting curbs and limits on advances against gold jewellery and gold coins by individuals;
- Continued sale of gold coins by banks, given their small volume;
- Setting base rate for imports of gold;
- Introduction of new gold-backed financial products to unlock the hidden economic value in the idle gold; and
- Introduction of products like Gold Accumulation Plan, Gold Linked Account, modified Gold Deposit and Gold Pension Product.
The working group has suggested a careful evaluation of the proposed gold-backed product and close monitoring of the rapid growth of assets, borrowings and branch network of gold loan NBFCs.
It has also suggested a gradual reduction in the interconnectedness of gold loan NBFCs with the formal financial system.
There is also a need to improve the capital of gold loan NBFCs, according to the group, which suggested a review of the current stipulations pertaining to raising of resources through NCDs by gold loan NBFCs.
The exemption available to secured debentures from the definition of ''deposit'' may be reviewed. There is also a need for monitoring transactions between gold loan NBFCs and unincorporated bodies, it said.
Though leverage of the gold loan NBFCs is not a cause for concern at the present juncture, going forward, there is a need for improving owned funds of the NBFCs. There is a need to thoroughly review the operational practices followed by gold loans NBFCs, it said.
There is a need to ensure transparent communication of loan terms by gold loans NBFCs while also instituting a customer complaints and grievances redressal system by gold loans NBFCs.
Besides it has suggested:
- Review of auction procedure by gold loans NBFCs;
- Localising of auctions at the same taluka where the borrower is located;
- Prescribing post-auction safeguards to be followed by gold loans NBFCs;
- Prescribing better disclosure standards to be followed by gold loans NBFCs;
- Monitoring the implementation of Fair Practices Code;
- Standardisation of documentation to be followed by gold loans NBFCs;
- Use of PAN card for large gold loan transactions;
- Payment through cheque for large gold loan transactions;
- No case for conceding level playing field for the gold loan NBFCs with the banks;
- Review of the extant 'loan to value ratio';
- Clarity in the definition and standard of the term 'value' for prescribing appropriate 'Loan to Value Ratio';
- Moderating unbridled growth of branches by large gold loan NBFCs;
- Setting up of an ombudsman to address the grievances of gold loan borrowers; and
- Rationalisation of interest rate structure by gold loans NBFCs.
The working group has found that gold loans have a causal impact on gold imports substantiating the emergence of a liquidity motive for holding gold.
International gold prices and exchange rate significantly and positively affect the gold prices in India and this increase in gold prices appears to be one factor that increase the gold loans outstanding, according to the group.
There is, however, the increase in gold loans extended by NBFCs and banks does not significantly impact gold prices in India. On the basis of empirical analysis of volatility in gold price, it is also difficult to estimate future prices of gold.
Going by the past trends, a sharp sudden drop in gold price by 30 to 40 per cent is a remote possibility causing financial distress to the gold loan NBFCs.
However, the extant loan to value ratio (LTV) ratio should provide a reasonable risk cover in case the gold prices fall by 10 per cent, it said
Asset quality, NPAs as per cent of total credit exposure and capital adequacy of gold loan NBFCs are not a cause for concern at present. The sources of funds of gold loan NBFCs also do not appear to be an immediate cause of concern giving rise to concentration credit risk.
It has raised concern over some gold loan NBFCs raising public deposits surreptitiously through unincorporated bodies.
Banking sector's existing exposure in the form of their individual gold loans appears small and may not have any significant repercussions for the stability of the banking sector at present, it said, adding that the probability of volatility in gold prices impacting the gold loan market is also low.
Gold loans NBFCs are subjected to prudential regulations and reporting requirements and are doing a socially useful function and that provides a strong rationale for a careful regulation of the activities of these NBFCs, it pointed out.
The recent slew of regulatory measures taken by RBI on the functioning of the gold loan NBFCs may be continued to ensure a healthy growth of the sector in the medium and long term, it added.