Money & Banking

Case for a national gold bank

T. V. Gopalakrishnan | Updated on January 24, 2011 Published on January 24, 2011

India owns over 18,000 tonnes of above ground gold stocks worth around $800 billion, almost 11 per cent of the global stock, according to the World Gold Council (WGC) estimates.

This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for more growth, says a WGC research paper ‘India: Heart of Gold'.

Gold demand

In 2009, total domestic gold demand reached $19 billion, or Rs 97,400 crore, which accounts for 15 per cent of the global market, according to the WGC.

While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves India ranks 11th in the world with 557.7 tonnes. Above ground gold stock is different from the total gold reserves.

Over the past 10 years, the value of gold demand in India has increased at an average rate of 13 per cent a year, outpacing the country's real GDP, inflation and population growth by 6 per cent, 8 per cent and 12 per cent, respectively.

The country at present has one of the highest savings rates in the world, estimated at around 30 per cent of total income, of which, 10 per cent is already invested in gold.

Storing surplus gold

In this backdrop, the setting up of a national gold bank (NGB) assumes importance. Such a bank, if set up, can gradually pave the way to have stock of surplus gold in the economy in one place.

Over a period, the bank can have a say in controlling the volatility of gold prices in the domestic market, in particular, and can also act as a regulator of bullion market which is fast expanding, with international linkages.

The bank can engage in the purchase and sale of the yellow metal and act as a trustee/pledgee for banks/institutions having gold surplus, and also keep gold for safe custody or raise funds against the precious metal to meet their liquidity constraints.

As it is, the rate of deposit growth of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase.

Generally, Indians have a weakness for gold and the demand for gold is price insensitive. It is all the more so when the real rate of interest on deposits has been negative or insignificant compared to the rise in gold price

The banking system has been facing liquidity problem off and on and raising funds from the market poses a series of difficulties. Funds are becoming a major constraint to develop infrastructure. It is time for banks to find alternative sources of funds to continue to be vibrant in business and provide the well-needed support system for economic growth. One way to attract deposits is to encash the idle gold. In this context, the revival of the gold deposit scheme (introduced in 1999) has to be seriously considered. According to WGC, India's annual gold consumption is around 800 tonnes and gold reserves could be around 25,000-30,000 tonnes.

Gold as deposit

The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of, say 3 or 4 per cent a year. The banks can keep this gold as trustees. The investor earns interest on the idle gold while also securing his holdings under the custody of the bank.

For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand credit portfolio.

The banks should be given exemption from SLR for these deposits against the gold, as there is no additional liquidity created and the liabilities are fully backed by the gold they hold. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms.


The advantages of setting up a National Gold Bank are many. The bank can make bulk purchases from the open market including the international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell it to the National Gold Bank or raise funds by pledging it. This will bring down banks' borrowings from the RBI. The National Gold Bank can have a refinance arrangement with the Reserve Bank of India till such time it stabilises its operations. Money market operations can be better regulated and the black money component may gradually come down if the gold held in the country is brought under regulated market.

Over a period, when the gold bank's operations get fully stabilised, the influence of gold in the market becomes predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy.

For the banks, such an arrangement provides opportunities to expand their business in terms of deposits, borrowings and loans.

For the economy, benefits out of a gold bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates minimising generation of black money as the gold becomes a declared asset with the banks.

Once a large quantum of gold comes under the custody of the gold bank, Government's fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the international market will improve. It will be a win-win situation for banks, investors, the economy, and the Government.

(The author is former Chief General Manager, RBI. Views are personal.)

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on January 24, 2011
This article is closed for comments.
Please Email the Editor