That said, there are other ways to monetise this stock, such as offering loans against jewellery, which are hugely popular in India. For instance, as of May 2022, consumer loans (for non-agriculture purposes) from commercial banks against gold jewellery surged to Rs.738bn (~200-250t), nearly tripling from 2019 levels.42 The share of Non-Banking Finance Companies (NBFCs) in this space is even higher, with outstanding loans estimated to be around 400-500t.43 Given that jewellery is a key and often indispensable part of Indian household assets, the growth of this market underlines the importance of gold in the country’s financial eco-system and its potential to play a key role in improving the penetration of organised credit across large parts of India.
GMS is key to reduce import dependency
It is no surprise that the government wants to access more of India’s above-ground gold stocks. Doing so would help reduce import dependency and lessen the strain on the country’s CAD.
To provide some history, India announced a Gold Deposit Scheme (GDS) in 1999, which allowed individuals to place gold in deposits with banks and earn interest. To increase its attractiveness, the scheme was exempt from capital gains, wealth and income taxes. Despite these exemptions, it saw little success, with only around 2t mobilised by 2015. At the time, the biggest drawback was the minimum deposit required, which was 500g. Metals Focus believes that this was set without fully understanding the gold market; the average household was unlikely to hold so much gold and could not participate. In addition, gold collected under the scheme was melted down, creating further challenges given the sentiment attached to jewellery – in particular, inherited jewellery. As a result, the scheme was mostly used by temple trusts.
In 2015 the government replaced GDS with a new scheme – the GMS – to address some of the drawbacks of the earlier programme. The GMS lowered the minimum deposit to 30g (either as bullion or non-studded gold jewellery) and increased the interest rate to between 2.25-2.50% for deposits exceeding five years. As with the earlier scheme, earnings from the GMS were exempt from capital gains, wealth and income taxes. Despite these advantages, gold mobilised through the scheme reached only~21t over its lifetime.
A revamped GMS was announced in April 2021 to further improve collection.44 The new format slashed the minimum deposit size to 10g and included bars, coins and non-studded jewellery, with no maximum deposit limit. To improve its reach, jewellers and refiners were allowed to act as mobilisation, collection and testing agents, provided they fulfilled certain conditions (e.g. certification by the Bureau of Indian Standards (BIS) and other criteria set out by the Indian Banking Association).45 An example of how jewellery retailers act as collection agents in Turkey is given in (Focus 3).
R-GMS allows consumers or institutions to deposit gold in a Medium-Term Government Deposit (MTGD), for a maximum duration of either five or seven years (with a minimum lock-in of three years), and a Long-Term Government Deposit (LTGD) for 12-15 years (with a minimum lock-in of five years). On maturity the principal repayment is made in gold while interest (2.25% for the MTGD and 2.5% for the LTGD) is paid in rupees. Premature withdrawals from the scheme are only permitted after the lock-in periods of three and five years.46
Headwinds and recommendations for GMS
These changes have been welcomed by the industry, although several issues continue to be a hindrance to the success of GMS. Most significant is a lack of awareness. The India Gold Policy Centre’s (IGPC) nationwide household survey on gold consumption showed that only 6% households were aware of the scheme.47 The results also indicate that poor understanding often leads to depositors comparing the interest rate on gold deposits with those on rupee bank deposits. In our view, it is important to educate consumers that the two are not comparable: rupee deposits will always attract higher inflows as money is lent to corporates at significantly higher interest rates.
Another important headwind is the psychological hurdle that comes with melting down jewellery. For Indian women in particular, jewellery often has an emotional and cultural attachment and they can be unwilling to part with jewellery that they know will be melted. As a large part of Indian household gold is in the form of jewellery this is a key issue. The initial thrust of monetisation should therefore be on attracting retail bars and coins to place on deposit (these are not melted). It is also important to mobilise more gold from temple trusts, which tend to have large gold stocks. While this is already underway, more must be done to attract these holdings rather than continue a reliance on small deposits of household gold.
In terms of operational improvements, the dematerialisation (electronic) of MTGD and LTGD is a key missing piece in the GMS jigsaw. This is important in igniting investor interest as dematerialisation of gold holdings allows fungibility for investor portfolios. Furthermore, the role played by the RBI could also be reviewed; currently it provides a regulatory framework for gold deposits but it could manage all aspects of the programme.
Banks should be offered better incentives to run the scheme rather than just act as agents who collect gold on behalf of the government. If banks can independently take and service gold deposits instead of this being a government function, they may be able to earn healthier margins, which in turn could incentivise them to market GMS to their customers. One suggestion from the IGPC is that banks should be allowed to utilise the gold deposits they handle at their own discretion.48 For instance, banks might be interested in minting coins to increase revenue, which would allow them to offer higher interest rates and meet the cost of mobilising this gold. Provided credit, liquidity and solvency risks are addressed, there appears to be little reason to discourage them from doing so..
It is also important to leverage the reach of digital gold products and be able to link digital holdings to GMS. Investors owning digital gold should be able to seamlessly deposit those holdings in a GMS, thereby enabling them to earn interest without the operational costs involved with physical gold. While digital gold holdings are still extremely modest, providing this kind of fungibility could attract more investors and help to ensure better participation in the scheme.
The loan against jewellery market has played a key role in improving financial inclusion
While monetising gold holdings through schemes such as GMS has proved challenging, the gold loan market is long established and thriving. Historically, these loans were dominated by informal sector lenders such as pawnbrokers, moneylenders and retail jewellers. However, the organised sector has experienced significant growth over the last few years due to the ease of obtaining loans and lower interest rates. This has helped to improve financial inclusion and facilitated access to credit for a large number of people who otherwise would have had to use informal credit sources with far more expensive interest charges. COVID helped to consolidate the role of this sector, as Indians chose to pledge their gold during the pandemic rather than sell it outright, which historically has often been necessary during times of distress.
To provide a backdrop, the loan against jewellery market in India, including agricultural gold loans, is estimated to be valued at around 2,950-3,350t of gold (Table 3).49 The accelerated take-up of gold loans by consumers during the pandemic is indicative of a growing acceptance of such loans, especially among those who lack access to formal credit. In turn, this underlines gold’s role in enhancing financial inclusion. The growth in the loan market is also partly due to the fact that lending against gold is slowly becoming more organised, enabling quick, transparent and hassle-free loans. Although 60% of the market remains unorganised, the share of organised lenders has risen from 35% in 2019 to 40% in 2022.50
Table 3: Gold loan market size in India*
* As of February 2023.
Source: Metals Focus, Reserve Bank of India, Various Studies, World Gold Council
The organised space has thrived over the last few years. Since 2014 both banks and NBFCs have been permitted the same loan-to-value ratio (LTV) of 75%, allowing NBFCs to compete against banks on a level playing field. By current estimates the total outstanding loan book for the organised sector (including agricultural gold loans) is about 1,200-1,300t. Within this, loans offered by banks are equivalent to 200-250t for non-agricultural (NA) purposes and around 400-500t for agricultural purposes – these are included in priority sector lending by banks.51 ,52 Nevertheless, NBFCs provide the majority of gold loans to consumers due to their quicker processing times, greater flexibility and reduced paperwork, compared to the banks (Table 4).
Focus 3: Borsa Istanbul’s pivotal role in the Turkish gold market
Prior to 1984 there was no official mechanism to import gold into Turkey. It was only then that the Central Bank of the Republic of Turkey (CBRT) was authorised to import and export bullion without paying any duty. At the same time, other banks were allowed to sell bullion sourced from the CBRT in the domestic market. However, up until 1993 when the Gold Control Act was abolished, gold imports and exports were heavily regulated by the government and supply often fell short of what was a flourishing jewellery export sector along with growing local consumption. As the market was liberalised, 1995 saw the opening of the Istanbul Gold Exchange (IGE), which allowed members and the CBRT to import gold duty free, while paying only the Exchange fees for registering and withdrawing the metal (currently between 0.0006%-0.001% depending on the type of transaction). Prior to this, only the CBRT was allowed to import bullion.
The freeing up of the gold trade paved the way for other changes and contributed to a period of rapid growth across much of the Turkish gold market. As a result, there are now an estimated 5,000 manufacturers, of which over 50 employ between 200-1,500 workers, with a further 35,000 gold retail outlets employing around 250,000 people. Finally, some 12,000 employees work in the country’s gold mining industry, which produced ~ 39t of gold in 2022.
After the formation of the IGE and abolishment of the import duty, the IGE facilitated the trade in gold by setting standards for the bullion to be imported and establishing a framework for the gold market to operate in a more organised manner. This helped the industry to become more transparent; flows in and out of the country became clearer as there was no longer an incentive to bring in gold unofficially.
Furthermore, the IGE promoted the development of several gold-based financial products by enabling banks to trade physical gold in a more structured manner (rather than using the over-the-counter market, or OTC). During periods when Istanbul has traded at a noticeable premium or discount to London, the IGE helped the trade to benefit from arbitrage opportunities. In other words, the IGE connected Turkish commercial banks, gold bullion dealers and eventually the CBRT through participation in the Exchange. A precious metals and diamond market (PMDM) was formed to take over the activities of the former IGE after it and the Istanbul Stock Exchange merged in 2013 to form Borsa Istanbul (BIST). Currently, only PMDM members of Borsa Istanbul can import gold bars of standard purity (of at least 995) and non-standard purity.
Under the new regulation implemented in February 2021 all members are required to comply with these regulations, including those regarding bullion imports, which are similar to those outlined in the LBMA's Responsible Gold Guidance. Gold refineries and/or their affiliated precious metals companies trading at the BIST are all members of the Precious Metals Market, so both good delivery (GDL) and non-GDL operations are covered.
As part of the Turkish Gold Monetisation Scheme, the PMDM has also been closely involved with trying to mobilise some 3,500t of ‘under pillow’ gold held by Turkish households. This gold is collected by local banks and deposited into gold deposit accounts at the PMDM and used according to the banks' requirements. From the time it started in mid-2012, it is estimated that around 110t of gold has been collected from the public (as at the end of 2021). In order to effectively run this scheme, local precious metals refineries have been involved. Currently, there are two LBMA GDL and four non-GDL refineries operating in the country. The two GDL operations run this mechanism by providing assaying experts to the banks during their gold collection days before refining the accumulated metal into standard 995 gold bars.
Aside from that, accredited gold jewellery retailers operate as Altın Değerleme Noktası (Gold Valuation Points). As of July 2022, there are 290 such jewellery stores in 66 cities, with the goal to increase that number to 1,500 in 80 cities in two years’ time, working under the umbrella of Kuyumcu Altın Değerleme Sistemi (Jeweller Gold Valuation System or KAD-SIS) with the participation of seven banks. Through the full utilisation of KAD-SIS, the current 10-12t per year collection rate is aimed to be increased to 100t.
Çağdaş Küçükemiroğlu,
Consultant, Metals Focus
Table 4: Key features of gold loan offerings by NBFCs, banks and money lenders
* As of February 2023
Source: Source: Metals Focus, World Gold Council
Even though banks lag behind NBFCs in the non-agriculture loan sector, their loan book has grown strongly since 2019. To put this into perspective, loans offered by scheduled commercial banks against gold jewellery have surged.53 (Chart 8). This in turn was helped by government policies during the pandemic, including a rise in the permissible LTV for such loans from 75% to 90% between August 2020 and March 2021.54 This was applicable only to banks, not to NBFCs.
Gold spot exchange in India: a structural reform
The government announced its intention to establish a system of regulated gold exchanges back in the 2018-19 budget. At that time the Finance Ministry formed an expert committee on the integration of the commodity spot and derivatives markets.55 The committee suggested that regulation of the pan-India electronic spot exchanges – which involve clearing, settlement and risk management – should be entrusted to a regulator such as SEBI. Acting on this recommendation, in the 2021 budget the Finance Minister appointed SEBI as the regulator of domestic gold spot exchanges. As per SEBI’s framework for domestic gold spot exchanges, an Electronic Gold Receipt (EGR) would represent gold. The EGR comes with trading, clearing and settlement features similar to stock or securities, and removes investor fear of traders defaulting as it carries a transaction guarantee. Trading denominations can be 1g, 2g, 5g or 10g, or more.
In the 2020-21 budget the government announced its intention to set up an India International Bullion Exchange (IIBX) in the Gujarat International Financial Services Centre (GIFT-IFSC) to provide an additional trading exchange for global market participants.56The domestic gold spot exchange will provide liquidity and price transparency, ensure quality and prevent counter-party risk for investors. If implemented, the IIBX, combined with the domestic spot exchange, could lead to an improved GMS, while establishing India as a bullion trading hub along the lines of the Shanghai Gold Exchange (Focus 4).
Gold-backed products can enhance financialisation
Currently, less than 0.6% of India’s gold is held in financial form (gold ETFs, SGBS, etc.).57 This leaves huge potential to increase the penetration of gold-backed financial products, which could possibly benefit the Indian economy in several ways:
- Gold-backed financial products can offer improved liquidity (e.g. via round-the-clock access and instantaneous fund transfer), and savings potential (since they are often structured to allow small-unit savings/investment).
- Considering the quantum of gold holdings across a wide economic demographic, monetisation of gold could aid financial inclusion, allowing poorer, unbanked households to access credit more quickly and easily.
- Gold-backed financial products have the advantage of providing transparency, accountability and standardisation of gold in the economy
- Increased penetration of gold-backed financial products should encourage monetisation of physical gold holdings, contributing to an expansion of credit and boosting both investment and economic development.
Around the world, various gold-backed financial products are on offer (Focus 5). Indian gold spot exchanges could develop gold-backed financial products modelled on best practice, which may provide impetus to the financialisation of gold in India.
Focus 4: How the advent of the spot exchange transformed China's gold market
Due to historical factors and economic considerations, gold purchase and gold distribution in China fell under the unified planning and arrangement policy of the People's Bank of China (PBoC) before 2002. Along with the country’s development of a market-oriented economy and the desire to improve the financial market system, liberalisation of the Chinese gold market was put on the agenda. Against this backdrop, with the approval of the Chinese State Council, the PBoC officially established the Shanghai Gold Exchange (SGE) on 30 October 2002, marking the full opening up of the Chinese gold market. In September 2014, the SGE launched the international board, which became a vital link between the Chinese and the global gold market. In April 2016 SGE introduced ‘Shanghai Gold’, the world’s first gold benchmark price denominated in Renminbi, markedly raising the pricing power of China’s gold market.
After more than two decades of effort, the SGE has established a multi-layered gold market system, comprising price matching, price inquiry, Shanghai Gold Benchmark Price and gold leasing markets in terms of trading modes. The total trading volume of gold contracts listed on the SGE stood at 13.08tn RMB (34.8k tonnes) in 2021, ranking third in the world.
The price matching market is currently the largest in terms of trading volume, wherein financial institutions, gold producers, gold consumers and other institutional and individual investors can trade fourteen spot gold contracts. Au100g, Au99.99, Au99.95, Au99.5, iAu100g, iAu99.99, iAu99.5, and PGC30g require the full amount of trading; while Au (T+D), mAu (T+D), Au (T+N1), Au (T+N2), NYAuTN06, and NYAuTN12 allow margin trading. Investors can trade different contracts depending on their trading purpose, financial profiles and investment experience. The most actively traded contract is the gold deferred contract (Au T+D). In addition to the general practices of margin trading, bilateral trading (long and short), and daily mark-to-market, Au (T+D) allows deferred delivery. This means that delivery can be taken either on the transaction day or any other trading date afterwards on the condition that the investors meet the margin. In my opinion, such characteristics give investors and the industry chain a more diversified portfolio and convenience in capital management, hedging and risk control.
The SGE had 286 members at the end of 2021, including 154 ordinary members consisting of 30 financials and 124 generals, and 132 special members composed of 8 foreign financials, 95 internationals and 29 brokers, trusts, small and medium-sized banks and other institutions. Non-membership can trade via an SGE membership as the broker. Commercial banks are responsible for most of the trading volume of both brokerage and proprietary trading. At the date of writing, SGE has 71 certified vaults (many of which are commercial bank vaults) in 36 cities and regions throughout China. SGE adopts a ‘unified dispatching’ model for gold delivery, which benefits gold industry enterprises’ financing, production, processing, wholesaling, and import and export activities with convenience and cost-efficiencies.
Every retail bank sets up a precious metals business department to deal with precious metal trading, customer management, marketing, and investor education. I think this has been critical for the growth and prosperity of the spot trading market. Commercial banks launched the gold accumulation plans (GAP) and paper gold business, both of which are physically backed (at a certain ratio as required) and locally stored. Investors can sell back or take delivery of various gold products, including jewellery, displays, and gold bars and coins, with extra payment for labour costs. Paper gold trading was popular among Chinese gold investors in previous years until several commercial banks suspended their SGE brokerage trading business for individual accounts.
The price inquiry market, serving as an essential platform for institutions to trade customised derivatives, offers a wide range of products, including spot, forward, swap and options for gold. These various financial instruments satisfied institutional investors (often with large transactions and risk management requirements) with diversified investment allocation. The trading volume of the price inquiry market over recent years has rapidly increased. The leasing market allows the gold market to perform its investment and financing functions better via interbank gold leasing transactions and gold leasing transactions between banks and enterprises. In my opinion, the gold leasing service improves the efficiency of the capital. It broadens the financing channels, reduces financing costs and enriches the risk management tools for enterprises in the industrial chain.
The emergence of the gold spot contract is a milestone for developing China's gold market. First, it is regarded as a price reference for the domestic gold industry, including the physical gold sales and scrap business. The subscription and redemption of domestic listed gold ETFs are also linked to the spot gold contracts or Shanghai Benchmark Gold prices. Second, it provides an alternative gold trading avenue for Chinese investors and enables their involvement in global gold trading markets. It leads investors to pay closer attention to global political and economic developments and financial investment market dynamics. Third, it promotes investment diversification for Chinese gold investors via various investment avenues, including GAP, paper gold trading, ETFs, and gold-based wealth management products.
Mr. Zhang Wenbin
Shanghai Gold Exchange
Focus 5: Selected gold products available globally
Apart from traditional investments in gold such as bars and coins, there are several gold products available globally. Among them, ETFs, gold accounts, digital gold and paper gold are widely available in many countries.
Turkey has a wide array of gold banking products, exceeding most countries. First introduced over two decades ago, the market for gold banking products has grown appreciably.
- Gold-to-Gold Participation Account
Offered by Islamic banks, the deposited gold earns a return in gold via the bank’s investment of this gold in products allowed by its Sharia Board. Although in theory there is a profit-sharing mechanism, in practice a return is guaranteed within a certain scale.
Gold is traded in Turkish Lira (TL) or US$, without the issues associated with taking delivery. The entry cost is minimal, either TL1 or US$1. It is not mandatory for all gold accounts to be physically backed. Gold is bought and sold via bank branches, mobile banking, internet branches and phone banking.
Gold can be bought or sold at any time. There is no interest rate and no maturity date. The minimum transaction is just 0.01g. Some banks allow gold to be withdrawn in physical form, or the investment can be converted into other gold banking products.
The account can be opened with a maturity date ranging from one month through to three months or one year. Non-Islamic banks pay interest, which works via a profit-sharing mechanism at Islamic Finance Institutions in a similar fashion to the gold-to-gold participation account. In both cases, there is a 15% withholding tax. The minimum account opening amount is usually 50g.
This is a co-branded credit card offered by Atasay Jewelry and Garanti Bank. Card users earn Atakulche (Atasay’s gram gold brand) from everyday purchases. The accumulated gold can then be physically redeemed at Atasay Jewelry stores in denominations of 0.5g, 1g, 2.5g, 5g, 10g or 20g. The gold can also be accumulated in a Garanti Bank gold savings account through automated monthly regular purchases from a credit card.
This is offered by TEB (a subsidiary of BNP Paribas) to jewellers to help finance their purchases. Jewellers’ payment dues are charged as spot gold credit or divided into gold instalment credit within the credit limits designated for the jeweller using a specially designed POS machine. The minimum transaction amount is 20g.
In the UAE, Emirates NBD bank offers a non-interest-bearing gold account for individuals with no physical delivery option. Rakbank also offers a gold account for individuals with a minimum account opening amount of 1g with the option to redeem for physical gold at select Rakbank branches for a minimum of 10g, and the maximum amount allowed to be withdrawn per day is 5kg. This account does not earn interest as well.
In Malaysia, banks offer a gold cheque service tied to this account, which can be given as a gift for special occasions such as birthdays, festive seasons or corporate events. It is available in 1g and 2g denominations, valid for three months after issuance and there is a fee of RM5.30 (around US$1.20) per cheque.
In Jordan a savings account can be opened for gold and silver. Partial liquidation is allowed twice a year. The account does not earn interest.
In Saudi Arabia, Saudi National Bank (SNB) offers Shariah compliant gold account for individuals. If the customer wants physical delivery, gold can be received as 49s kilobars only and a SAR 250 (US$66.5) fee applies for each bar.
In China, there are several available options for gold investors mainly:
- Paper gold trading via commercial banks
Investors can choose to take delivery of physical gold at a counter. However, more than 20 commercial banks announced the suspension of the new opening of individual accounts for gold and silver trading in late 2020 for risk control reasons. Likely, this option will completely disappear soon.
This is offered by commercial banks in China and is physically backed and locally stored. Investors can sell back or take delivery (in various available gold products: jewellery, displays, gold bars and coins).
Elsewhere, banks in Hong Kong offer ‘Gold Passbook Accounts’ for gold trading services that enable clients to buy and sell gold through the account. However, there is no exchange of physical gold.
There are plenty of options available in Japan as well. Gold accumulation plans are offered by a small number of players who typically have a physical (i.e., bar/coin) presence. All are physically backed and locally stored with an option to sell back or with delivery.
That aside, over the last three years, physically backed gold-based tokens have also been announced to capitalise on the interest in blockchain technologies. Gold-pegged cryptocurrencies are designed in a similar way to stablecoins, but rather than being backed by any particular currency such as the US dollar, they are backed by the value of physical gold. The ratio of gold backing however differs. For instance, some tokens, such as the Perth Mint Gold Token (PMGT), are backed at a ratio of 1:1, in which one token is equivalent in value to 1g of gold, whereas others use different ratios. The PMGT is one of the few cryptocurrencies validated by a government. Although some of these products involve costs such as exchange fee and demurrage (shipping) fee, most do not have any transaction fees or storage costs.
Chirag Sheth
Principal Consultant, Metals Focus
Estimated value based on the annual average 2022 LBMA Gold PM Fix price
Reserve Bank of India
Metals Focus based on industry numbers
Reserve Bank of India
Reserve Bank of India
Reserve Bank of India
IGPC Annual Report 2021-22. The national survey was carried out by the IGPC at the Indian Institute of Management Ahmedabad in associated with the People’s Research on India’s Consumer Economy (PRICE)
IGPC Annual Report 2021-22
Metals Focus estimate based on industry and RBI figures.
Metals Focus
Tonnage derived from RBI data of outstanding loans in Rs terms.
Priority sector lending means loans given to sectors which the Government of India and Reserve Bank of India consider as important for the development of the basic needs of the country and hence receive priority over other sectors. Banks have lending targets for each sector defined as priority.
Reserve Bank of India. For a definition of a scheduled bank, see https://cleartax.in/g/terms/scheduled-bank
Reserve Bank of India
GIFT is India’s only International Financial Services Centre for bringing offshore financial transactions to the Indian territory.
Based on the tonnage of gold ETF and SGB at end of February 2023
