Refiner Say Modi Plan to Tap India’s Gold Hoard Falls Short

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Prime Minister Narendra Modi’s draft plan to tap India’s gold hoard and cut its reliance on imports needs more work to get banks involved, according to the chief of the country’s biggest refiner.

An estimated 20,000 metric tons or more of bullion -- more than double holdings in the U.S. -- is stashed in India’s homes and temples, even as imports surge due to low prices. The government hopes that getting citizens to lend their gold to banks is one way to redress the influx and improve the trade balance of the world’s biggest buyer of the metal after China.

While the finance ministry’s draft released in May would let banks set the interest rate on gold lending, it doesn’t adequately allow them to hedge their exposure, said Rajesh Khosla, managing director at MMTC-PAMP India Pvt, in an interview in Mumbai last week. That’s because banks will have to hold onto small deposits of as little as 30 grams and pay interest to customers until they accumulate a large enough amount to pass onto jewelers.

“The bank is not earning anything from the gold as he has not yet lent it,” he said. “How do you compensate for this gap? This has not been addressed by the government.”

Even if such technicalities can be ironed out, implementing the plan will be tough in a nation where gold is so central to life that demand tied to weddings and festivals can move global prices.

Capital Buffer

While the draft allows banks to deposit bullion with the Reserve Bank of India as part of their capital buffer requirements, the rules ought to be clearer on certification, said Khosla. “Will the RBI accept any kind of gold or just London Bullion Market Association-certified gold?” he said, referring to the group that sets global refining standards.

The plan also needs to tackle taxes incurred by the movement of gold between states, said Khosla, who contributed feedback on the draft to the finance ministry.

“Unless these issues are addressed no matter what interest rate you keep, the customer is not going to come and the bank is not going to encourage the consumer,” he said. “Ideally, the government should have formed a task force of banks, refiners and industry people to debate upon these issues.”

India will import between 900 tons and 1,000 tons this year as the slump in prices attracts buyers during the festival season starting from September, Khosla said. Shipments were 891.5 tons in 2014, according to the World Gold Council. Futures in Mumbai have declined 11 percent in the past year, making purchases cheaper.

Finance Ministry Spokesman D.S. Malik said the government has been collating feedback from the industry and other ministries on the draft rules and there is no deadline yet for releasing the final version.

A deposit plan run by the State Bank of India since 1999 has only attracted 15 tons of gold because of uncompetitive interest rates, according to UBS Group AG.

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