More Than 90% Of Its Gold

Report of the Working Group to Study the Issues Related to Gold Imports and
Gold Loans by NBFCs
(Draft for seeking public comments)
RESERVE BANK OF INDIA January 2013

Report of the Working Group to Study the Issues Related to Gold Imports and
Gold Loans by NBFCs in India
Reserve Bank of India
December 2012

Reserve Bank of India

Working Group to Study the Issues Related to

Gold Imports and Gold Loans by NBFCs in India

No.

Contents

Page

List of Tables/Exhibits/Box

ii

List of Charts

iv

List of Select Abbreviations

vii

1 Summary

1

2 Introduction

11

Section I - Macro Issues

3 Recent Trends in Gold Imports and External Sector Stability

18

4 Role of Banks in Gold Imports and Retailing of Gold Coins

45

5 Dematerialisation of Gold – Scope for Introduction

58

Section II - Micro Issues – Gold Loan NBFCs

6 Gold loan market in India – An overview

81

7 Recent Trends in Gold Loans and Influence on Gold Imports

90

8 Recent Trends in Gold Loans and Impact on Gold Prices

99

9 Liability Management – An Assessment of Financial Performance of

114

Gold Loan NBFCs-ND-SI

10 Recent Trends in Gold Loans and Domestic Financial Stability

127

11 Customer Protection - Practices Followed by Gold Loans NBFCs

146

12 Prudential Norms Relating to Gold Loan NBFCs – An Assessment

171

13 Summary of Recommendations and Major Conclusions

186

13 Select References

204

14 Participants in the meeting with External Agencies

205

15 List of Officers Associated with the Working Group’s Report

208

i

List of Tables/Exhibits/Box

No.

Table Title

Pg. No.

1 Table 3.1: Global Gold Supply and India’s Demand for Gold

31

2 Table 3.1.2: Annualized Monthly Average Growth in Gold Price and WPI

34

3 Table 3.1A: Trends in Gold Imports

37

4 Table 3.2: Assumptions under Five Scenarios

45

5 Table 3.3: Scenario 1- Imp Gold Qty Gr. 3% p.a, Int. gold price = US$

46

1645.2 per troy ounce, Export content of Import=29.2%

6 Table 3.4: Scenario 2- Imp Gold Qty Gr.3% p.a, Int. gold price = US$

46

1750 per troy ounce, Export content of Import=29.2%

7 Table 3.5: Scenario 3 - Imp Gold Qty Gr.5% p.a, Int. gold price = US$

46

1645.2 per troy ounce, Export content of Import=29.2%

8 Table 3.6: Scenario 4 - Imp Gold Qty Gr.5% p.a, Int. gold price = US$

47

1750 per troy ounce, Export content of Import=29.2%

9 Table 3.7: Scenario 5 - Imp Gold Qty Gr.10% p.a, Int. gold price = US$

47

1750 per troy ounce, Export content of Import=29.2%

10 Table 4.1: Import of gold by the Nominated Banks

59

11 Table 5.1: Gold Futures and OTC Market Vs Physical Market for Gold

67

12 Table 5.2: Gold ETFs in India

72

13 Table 5.3: Broad Classification of Gold-backed Financial Instruments

85

14 Table 6.1: Annual Growth Rate of Gold Loans Outstanding

92

15 Table 6.2: Annual Growth Rate of Borrowings Outstanding by Gold

94

Loans NBFCs

16 Table 7.1: Growth rates of gold loans, gold prices and gold imports

98

17 Exhibit 7A.1: Correlation analysis between gold loans and gold imports

102

18 Exhibit 7A.2 : Pair wise Granger Causality Tests – Total Gold loans and

103

Gold imports both expressed in real terms (Variables in logs and

adjusted for seasonality)

19 Exhibit 7A.3: Pair wise Granger Causality Tests- Gold Loans by NBFCs

103

and Gold imports both expressed in real terms (Variables in logs and

adjusted for seasonality)

20 Exhibit 7A.4: Gold Loans and Gold Imports -Two Stage Least Squares

104

estimates (Variables in logs and adjusted for seasonality) HAC

estimates.

21 Exhibit 7A.5: Determinants of India’s Gold Imports

106

22 Exhibit 8A.1 : Pair-wise Granger Causality Tests- Gold loans by NBFC's

114

expressed in real terms and Gold prices

23 Exhibit 8A.2: Pair-wise Granger Causality Tests- Gold loans by NBFC's

114

expressed in real terms and Gold prices

24 Exhibit 8A.3: Long Run Equation Results of ARDL (1, 1, 1)

116

25 Exhibit 8A.4: Short Run ECM results

116

26 Exhibit 8A.5: Heteroskedasticity Test: Breusch-Pagan-Godfrey

118

27 Exhibit 8A.6: Gold price volatility

119

28 Appendix Table 8AT.1: Correlation Structure among the factors 120

ii

influencing Gold prices in India

29 Appendix Table 8AT.2: Test for Stationarity

121

30 Appendix Table 8AT.3: ARDL (1,1,1) Cointegration test results

121

31 Appendix Table 8AT.4: Diagnostic test results for ARDL (1,1,1)

121

Cointegration

32

Table 9.1: Assets of Gold Loan NBFCs vis-à-vis NBFCs-ND-SI Sector

122

33 Annex- 9.I: Gold Loan NBFC-ND-SI

134

34 Table 10.1: Selected soundness indicators for gold loan NBFCs

141

35 Table 10.2: Classification of gold loan NBFCs by CRAR

142

36 Table 10.3: Size of gold loans in total loan portfolio of banks

143

37 Table 10.4: Distribution of banks by their exposure to gold loan NBFCs

149

38 Box 11.1: NBFC Gold Loans – Case Studies

160

39 Table 12.1 Provisioning requirement in respect of loans, advances and

182

other credit facilities including bills purchased and discounted

40 Table 12.2: Differential Regulatory Treatment for NBFCs vis-à-vis

185

Banks

41 Table 12.3: Growth (Q-on-Q) in Gold Loans Outstanding by

187

Systemically Important Major Gold Loan NBFCs (%)

42 Table 12.4: Growth (Q-on-Q) in Bank Borrowings by

187

Systemically Important Major Gold Loan NBFCs (%)

43 Table 12.5: Growth (Q-on-Q) in Other Borrowings by

188

Systemically Important Major Gold Loan NBFCs (%)

44 Table 12.6 and 7: Break-up of the jewellery price

191

45 Participants in various meetings related to the Working Group

195

iii

List of Charts

No.

Chart Title

1 Chart 3.1: Annual Returns of Various Domestic Assets in Recent

Years

2 Chart 3.2: Cumulative Returns of Domestic Assets (January 2008

– May 2012)

3 Chart 3.2.1: Annual Average Growth of Gold Price and WPI

4 Chart 3.3: Movements in Key Indicators and Gold Imports

(Annual 2003-2012)

5 Chart 3.4) Movements in Key Indicators and Gold Imports

(Quarterly March 2003-March 2012)

6 Chart 3.5 : Trend in International Gold Prices

7 Chart 3.6: Month-wise Deviation of Gold Prices from Six Months'

Average Gold Prices

8 Chart 3.7: Value and Growth of Gold Imports

9 Chart 3.8: Trend in Gold Price and Volume of Imports

10 Chart 3.9: Growth in Gold demand: Global vis-a-vis India

11 Chart 3.10: Gold Import as a Ratio to GDP

12 Chart 3.11: Share of Export of Gold Jewellery in Total Gold

Imports

13 Chart 3.12: Share of Gold Imports in Merchandise Imports

14 Chart 3.13: Three-year moving average rate of

growth in bank deposits

15 Chart 3.14: Trend in Currency - Demand Deposit Ratio and Gold

Imports-GDP Ratio

16 Chart 3.15: Gold Price in USD and INR

17 Chart 3.16: International and Domestic Gold Prices

18 Chart 3.17: India's Trade Deficit with and without Gold Imports

19 Chart 3.18: Net Impact on Trade Deficit due to Domestic Demand

of Gold

20 Chart 3.19: Gold Trade Deficit as % of GDP Under Various

Scenarios

21 Chart 5.1: Gold Imports and Gold ETFs (AUM)

22 Chart 5.2: e-Gold Turnover on NSEL

23 Chart 6.1: Compound Annual Growth Rate of Gold Loans

Outstanding 2008-2012

24 Chart 6.2: Gold Loans Outstanding In India

25 Chart 6.3: Gold Loans Outstanding and Total Borrowings

Outstanding by NBFCs

26 Chart 6.4: Total Gold Loans and Total Borrowings by NBFCs

27 Chart 6.5: Bank Borrowing and Gold Loans by NBFCs

28 Chart 6.6: Gold Loans and Non Bank Borrowings by NBFCs

29 Chart 6.7: Bank Borrowing and Gold Loans by NBFCs

30 Chart 6.8: Share of Banks and NBFCs in Gold Loans Outstanding

iv

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