I should consider myself as very fortunate – I had the rare privilege to get associated ‘first’ with bullion banking in India when the official Gold policy was relaxed in the late 1990s and also to get associated with the first Indian bank to launch bullion banking.
I learnt the intricacies of bullion banking in the shortest time possible. Thanks to my colleagues and seniors in the bank, I launched one after another all the important and popular bullion products in Indian market – Wholesale Gold, Consignment Gold, Retail Gold, Unfixed Gold, Packing Credit in Gold, Recycling of Gold, Gold Deposit Scheme – well almost the entire package of bullion banking products.
It was a challenging time then for me – to understand the nuances of bullion import, to negotiate the first ever bullion insurance, to finalize the documentations for consignment gold import from abroad, documents for selling gold to customers in India, to comply with customs authorities requirements, to comply with local sales tax requirements, to ensure provision of secured transport arrangements, to firm up bullion banking accounting policies, to train the bank’s staff dealing with bullion banking.
I tried to develop some more bullion banking products – Gold Accumulation Plans, Location swaps, etc. They could not see the light of the day then for want of push / support from within the bank and also approval / clearance from Reserve Bank of India.
I am very happy to read from the press that our Finance Ministry’s Committee on ‘Deepening India’s household financial savings’ has sounded Reserve Bank of India and commercial banks on the possibility of introducing Gold Accumulation Plans, to be pitched as an alternative to direct investment in the physical yellow metal by Gold obsessed Indian consumers.
In a Gold Accumulation Plan, investors set aside a fixed amount of money each month. This money is then used to purchase gold bullion until the investor’s holdings have reached a desired size. The fixed sums can be small, and GAPs may be exempted from the premiums normally charged on the purchase of small gold bars and coins. Gold Accumulation Plans make it easy for private investors to enter the gold market without exposing themselves to a high level of risk. Because small amounts of gold are bought over a long period of time, investors insulate themselves from severe financial harm if the price of gold drops suddenly. Investing in a Gold Accumulation Plan removes much of the angst that comes with investing in more speculative assets. At any time during the contract term, investors can withdraw their gold in the form of bullion bars or coins
Due to high imports of oil and gold, India’s current account deficit (CAD) soared to a historical high of 4.2 per cent of GDP in 2011-12. A CAD results when a country’s total imports of goods, services and transfers exceed exports. To curb gold imports, the Government has raised the Customs duty. The RBI has tightened prudential norms for gold loan by non-banking finance companies, whereby they cannot lend beyond 60 per cent of the value of the pledged jewel. Given the average household’s yearning for gold, an accumulation plan may hold the answer to policy-makers’ concerns on physical import of gold.
I summarise below some important aspects that are to be taken care of by RBI and Commercial Banks in their scheme for Gold Accumulation Plans.
| Scheme details | Accumulation periodicity, Periodical Payments – Gold equivalent or Cash equivalent, Gold interest or cash interest, Closure on maturity, Premature closure, Loan facilities |
| Registration and Authorisation | Statutory authorities approvals |
| Identification | Suppliers, Markets, Customers, Facilitators |
| Infrastructure | Logistics mainly Storage, Transporters |
| Suppliers | Reputed international bullion banks |
| Associated requirements | Cash and Interest Management |
| Documentation | KYC and contractual terms |
| Books of accounts | Standards, Policies, Provisions, Entries |
| Hedging | Outright purchase, Paper account, unfixed form, Asset Liability Management, Gold Loans, Gold Lease, Gold Forward, Supply -> Retail -> GAP -> Packing Credit in Gold, Cash Flows |
| Risk Management | Conversion Risk, Replacement Risk, Price Risk, Unhedged portion, Credit Risk, Bullion Bank Counter Party Risk |
| Pricing | |
| Statutory levies | Customs duty, VAT/ST – Actual / Implied SLR, CRR, Regulatory capital |
| Education and development | Training and Development |
| Public relations | |
| Competition | Skill specific / Customer specific / Marketing / Planning |
| Technology | Functional Financial Technology |
In my view, Gold Accumulation Plans will become a very popular Financial Products in India right from their launch