India Needs to Set Up Bullion Banks to Build Trust in Gold Markets:WGC
The World Gold Council (WGC) has released a report on the need for India to set up bullion banking services as it is vital to solve the issues in the gold market due to lack of organisation, structure and trust despite being the second largest gold market in the world. A robust banking industry could support and accelerate that shift-inspiring trust, bolstering innovationa and driving growth. India currently has little interaction with global bullion banks. With its own bullion banking operations, India could play a larger and more influential role in the global market.
A bullion bank facilitates the
purchase, sale and use of standardised bullion or bullion-based derivatives.
Similar to commercial banks, bullion banks provide a range of products and
services, centred around deposits, advances, sales and trading. Customers span
the bullion value-chain, including central banks, miners, refiners, jewellers
and investors , both retail and institutional.
In countries with fully
functional, well organised bullion markets, such as the US, UK, China and
Switzerland, bullion banks can be divided into three tiers, based on the
breadth of services offered:
i) full-service bullion banks, offering diverse services across financing, sales and trading
ii) specialist bullion banks, focused on specific products and/or markets
iii) niche players, offering a limited range of services.
But, even though bullion banking operations differ significantly across the globe, four stand-out characteristics define and shape the industry:
-Central banks play a key role: as regulators, liquidity providers and custodians
- Flexibility for product creation and for incentivising banks to drive market development has been instrumental in the formation of leading bullion markets
- Bullion banks typically outsource storage and delivery infrastructure activities, thereby reducing risks and the overheads associated with handling physical gold
-Bullion banks manage five key risks – liquidity risk, interest rate mismatch risk, credit risk, market risk and operational risk. The critical role that bullion banks play in well-regarded gold markets worldwide – and the broad range of services they offer – suggest that an effective bullion banking market could bring multiple benefits to India. But the development of such a market requires determination and commitment.
The WGC said that policy makers, banks and participants should focus on five key areas to create a functional bullion market in India:
Vision: Bullion banking should become an enabling platform for India’s bullion ecosystem, driven by a strong, forward-thinking vision statement: “To unlock the economic potential of gold in India to promote transparency, growth and prosperity.”
- Regulations: Regulations need to be flexible enough to encourage retail participation and product innovation, but robust enough to ensure effective risk management. Essential regulatory changes include: allowing banks to trade and facilitate trading in physical bullion and bullion derivatives; providing flexibility for the launch of innovative gold backed products.
- Products: Indian banks should focus on limited offerings at first and gradually expand to more advanced offerings and global markets.
- Risk management: A combination of risk limits and wider operating/management controls would help to manage associated risks. Regulatory guidelines would enhance banks’ risk management processes from launch and help build systemic trust in the ecosystem.
-Operations: Bullion banking requires extensive expertise and industry knowledge. In areas such as risk, finance and operations, Indian banks could consider entering into joint ventures or alliances with global banks for knowledge transfer.
Source: World Gold Council