Gold backed financial instruments coupled with stricter monitoring of gold loan NBFCs is the prescription, made by a RBI working committee on gold related issues be it gold import or loan.
Alternative investment opportunities in gold will help curb the menace of current account deficit (CAD) on the back of higher imports. Strengthening the regulatory clutches on gold loan non-banking finance companies will mitigate the systemic risk arising out of any fluctuation in gold prices.
The Reserve Bank of India on Wednesday released the report, prepared by the committee headed by K U B Rao, advisor, department of economy and policy research at the central bank.
“There is a need to consider introducing new gold-backed financial products to unlock the hidden economic value in the idle gold in the economy. Introduction of products like gold accumulation plan, gold linked account, modified gold deposit and gold pension product may be considered,” the RBI panel said underscoring the importance of instruments like inflation indexed bonds that can generate real returns (inflation adjusted) to investors.
Due to expanding consumption demand, gold import were rising adding to higher CAD, which of late replaced inflation to emerge as a key threat to RBI’s monetary policy stance.
The panel urged to review fiscal measures to curb gold imports while it recommended setting up a Gold Bank that can pool the idle stocks of gold. The proposed entity can also perform other functions like refinancing.
“Bank finance to purchases of gold bullion may be prohibited. Banks may continue their role as nomiated agencies in gold imports. It is needed to convert both rural and urban demand for gold into instrument in gold-backed financial instruments through dematerialization of gold,” added the Rao-committee.
Meanwhile, it strongly advocated the cause to unlock the value of idle or unproductive gold (which lays in vaults only). The gold reserve on exchange traded funds (ETFs) may also be put for productive use while tax incentives gold-backed products like gold bonds are also proposed.
Gold loan NBFCs
Even though the expert committe did not see any forthcoming systemic risk from gold loan companies, it favoured gearing up regulatory supervision.
“The rapid growth of the assets, borrowings and branch network of gold loan NBFCs need to be monitored continuously. NPAs as per cent of total credit exposure and capital adequacy of gold loan NBFCs are not a cause for concern at present,” it said.
As prudent measures, it suggested to improve the capital base for gold NBFCs. In a bid to mitigage the risk of rippling impact into the financial system, it is in favour of reducing heavy bank borrowings from those gold loan companies.
One of the popular fund raising sources is through the public/private issue of non-convertible debentures (NCDs). Here also the RBI panel hinted at some sort of reviewing.
“There is a need to review the current stipulations pertaining to raising of resources through NCDs by gold loan NBFCs,” it added.
“Gold loan NBFCs are doing a socially useful function and that provides a strong rationale for careful regulation of the activities of these NBFCs.”
The committee did not expect any sharp price corrections in gold prices to the tune of 30-40%. Considering a possible 10% drop, it however, prescribed a risk cover to the loan to value (LTV) ratio currently mandated at 60%.
Source: Moneycontrol.com – Wed, Feb 06, 2013