Project Report on Bullion Banking

Introduction:Central Bank of India is palnning to go into the market of bullion gold sales with an objective to offer wide range of products to the clients and also to improve the profiability of the Bank. In terms of RBI (Reserve Bank of India) circular DBOD No. IBD.BC.33/23.67.001/2005-2006 dated 5th September 2005, Banks nominated to import gold have also been permitted to allow Gold Sales/ Loans to the domestic jeweller/ jewellry exporters.

Bullion Banking has flourishe mainly in the 1999 after the release of London Bullion Market Association trading data. The data reflected that 100 times more gold and silver trade hands just in the major markets, than it is produced or used. CBI are already in the field of the sale of gold coins in smaller denominations wherein CBI imports coin on the consignment basis ans sale proceeds are remittedto overseas supplier at market price. But gold coin are hardly of any use to the jewelery manufacturers, an bulk quantity of gold is required to cater the need of jewelers. CBI being an large bank this product is essential as part of boutique of financial services offered to our customer in addition to traditional banking. In order to compete with the other peer banks like Bank of India, Uniion Bank of India, Punjb National Bank etc who have already lauch the Bullion sale scheme, CBI is also about to enter in the

market of GOLD BULLION SALE.

In order to exploit the available oppurtunities , it is prudent for CBI to introduce sale of gold bar from 100 gms to higher weights and gold metal scheme. The movement of price of gold is price sensitive and also depends on flow of old jewellery in the market.The potential centres for bullion banking in India are Mumbai, Delhi, Kolkata, Ahmedabad, Rajkot and Cochin. For succesful exploitaation of such and market oppurtunity CBI has planned to lauch two schemesa. GOLD BULLION SALE SCHEME b. GOLD LOAN SCHEME.

1. GOLD BULLION SALE SCHEME:Bullion genrally refers to the mass of precious metal. Bullion sale mainly deals with the trading of preious metal GOLD. Under this scheme of CBI, gold bars will be indented from oversea's suppliers based on irrevocable order place by the customer.

The above fig shows the general flow of gold in the gold bullion sale scheme.

Main features of the Gold Bullion Sale Scheme a. The suppliers of physical gold in standard bar form are reputed banks such as Union Bank of Switzerland, The Bank of Nova Scotia, Commerz Bank,

Standard Bank SA, Societe Generale etc. b. CBI will enter MOU(Memorandum of Understanding with any of the suppliers mentioned in the above point) for the import of Stanard Gold Bars. c. The purity of the gold bars will be in three variants i.e 99.99%, 99.50%, 99.90% on the basis of purity. d. Bullion Bearinf "Hallmark" of Refineries Accredited to London Bullion Merchants Association will only be purchased by CBI in order to ensure validity of the products as per the purity requirements. e. Vaulting of the Bullion is done by the suppliers. f. Inurance/ Freight charges are borne by the suppliers.

Reasons why investors invest in Gold Bullion:-

1. Highest possible form of purity:whenever the investor is investing in bullion gold purchase he is getting an highest possible purity(99.99%, 99.50%). Record prices in the gold bullion market have made all forms of gold more popular, and this is espeially true with the purest form of the metal. 2. Normally Registered and Stamped:Bars and most other form of bullion gold products, including coins, usually have a stamp or registration number which allows them to be tracked. For mst investors this adds a level of security, because the gold has a registered owner or tracking number if it is ever stolen. 3. High Demand Means High Liquidity:Bullion Gold has seen a huge increase in popularity among investors, even many that would not have considered precious metals in the past. A big reason for this interest is the high spot price of gold, that also makes this form of bullion have an high degree of liquidity.Whenever the investor is in need of money , it will not be difficult for him to sell bullion gold, becuse buyers of bullion gold are readily available.

4. Far less risk of fraud or Fake bullion High price is associated with every ounce of bullion gold, so many scam artists and unethical sellers have tried to pass of fake coins and bars. Whenever the investor purchase bullion gold from an authorised bank the risk of being a victim to these scams is far lower. Most bars of this purity are tracked through each owner, and if any problems are detected it is an simple matter to investigate and determine who is resposible. 5. Best Investment in the opinion of Experts:The experts in the gold industry are very vocal about gold bar bullion which meets the highest putiry standards. With these bars and coins there are no surprises, and every relevant factor is disclosed. That is why most experts prefer the bullion gold. 7. Quality is known:While purchasing bullion gold bars, the investor is aware about the quality of gold he is buying. There are no unknown variables, and the investor is guaranteed that he is getting only the finest quality of gold. 8. Bullion Gold Bars are an hedge against inflation:For investers the bullion gold bars are an ulitmate hedge against inflation

Indian Bullion Market

Market for Gold Bullion in India:Trading of gold is known as bullion trading. India is the leading consumer and importer of gold in the world. Due to this,the potential of the Indian bullion market is very promising. Owing to the weak price of Dollar in the global market, the price of bullion is soaring. The gem and jewelry industry of India is one of the fastest growing sectors of the economy at an approximate rate of 15%. The Indian Bullion Market is under the strict supervision of the Government as bullion is one of the major indicators of the wealth of the country.

India is the largest investor in gold jewelry as a large number of people believe that investing in gold is beneficial. The domestic consumption of gold depends on factors like the wedding season, festive season, the performance of the harvest and the monsoon of the country. Country Bullion (in tons) 8133.5

United States France Germany 2445.1

3408.5

Italy 2451.8 Netherlands 612.5 Switzerland 1041.5 ECB 501.4

India 557.7 Russia568.4 Japan 765.2 China 1054.0

Gold has always been a desirable asset to invest into in India due to its special place in tradtions and customs of Indian people. Gold bullion market in India has many non-traditional for other countries factors influencing it like wedding seasons, cultural festivals, harvest turn outs and many more. Indian people have always preferred buying gold jewellry opposed to investing into gold bullion market or otehr forms of investment. However, this has started to chnage recently due to historically high gold price in India making highly coveted jewelry purchases way too expensive for many people. Gold consumers are switching their buying preferences and considering gold bullion market in India is still poorly organized and best gold bullion market prices all over the country drasticaly differ from one province to another. Moreover , foreign gold bullion purchases are

inaccesible to most people and gold bullion market in India is represented mostly by locally made bullion coins and bars. The only option available for investors in gold are the reputed Indian Banks. Banks like Central Bank of India, Bank of India, Punjab National Bank, Union Bank of India provide this service. Paper Gold Investment in India is also popular and sometimes preferred by some people who are hesitant about storing gold at home and do not want to rent a safety deposit box at the bank die to its high cost. Most National Banks offer paper gold investment accounts allwoing you to purchase gold certificates entitling you to ownership of a ser amount of gold that is stored at banks secure vault systems.

Indian Bullion Market Association:IBMA or the Indian Bullion Market Association is a national level body that represents the Indian Bullion Trade and Industry. This body is in association of all leading bullion dealers and jewelry merchants who have tied up with the National Spot Exchange Limited. The idea of this association is to promote a professional organizational dedication towards the deveopment and growth of the bullion industry in India.

Bulliom Purchase and Forex:In 2009, the government of India purchased 200 metric ton of gold from the international Monetary Fund (IMF) at $6.7 billion. This purchase signals that the economy of the country has come full circle and is also a way of spreading its assets. The current foreign exchange or forex reserve of India is nearly $285 billion.

Consideration for PAMP Suisse gold Bullion:The PAMP in PAMP Suisse gold means Produits Artistiques de Mataux Pracieux, and this is the name of the refinery where the gold is refined, This

refinery is located in Switzerland, in Castel San Pietro, and it is known as one of the finest gold refineries anywhere in the world. This gold bullion is similar to Credit Suisse gold bullion, because both these types of gold are backed by companies with a long and solid history of producing only the finest gold possible. PAMP Suisse gold bullion is the premier gold and there is virtually no chance of being scammed when you buy this form of gold. This is also true when you choose the Credit Suisse gold bar, becasuse both of these gold producers are known for their rigid quality standards an weight guarantees. This lets investors know that choosing PAMP Suisse gold means getting quality with no risks. A big part of the value of this gold type is THE TRUST that investors have in the PAMP name and quality Standards. With the gold bullion market at astronimcal highs, fake gold bullion products on the market can be a big concern. When the investor buy gold bullion bars, you want to get the gold amount and quality that you are paying for. With many producers the suppliers have to do numerous tests, and pay for third party verificaiton and assays. With PAMP Suisse gold an assay is done right after the gold bar is created, and the gold purity and weight is stamped into the inidividual bar. This lets the investors know that they are getting the real thing at the finest possible purity.

Competitors:-

Local Competitors :The local competitos for Central Bank of India in the local market are players like 1. Bank of India 2. Punjab National Bank 3. Union Bank of India

4. ICICI Bank.

Global Competitors:Top ten players on Gold Bullion market are 1.Blanchard Online Blancahrd Online is the top players on gold bullion market, and their website offers investment advice as well as gold bullion trading. A well known player in the precious metals market.

2. Monex Monex is a top player that makes purchasing gold bullion at a fair price easy and simple to do. This company deals in millions of dollars in precious metals each year, and is a name known and trusted in the industry.

3. Bullion Direct If the investors wants to invest in the wholesale gold bullion then Bullion Direct may be the top player the investors must be looking for. This dealer offers low markups and very reasonable prices and has a reputation of honesty and quality 4. Bullin Vault Bullion Vault offers very low gold bullion prices, and excellent customer service at the same time. This is a company that has been in business for a while, and has made a name as a top player in the gold bullion market. 5. American Bulliom This company specialized in precious metals in the United States, and has a history of excellent service and precious metals. 6. APMEX This company offers bullion for a sight markup over the market price of

gold, and has built a name as a quality precious metal dealer. 7. USA Gold 8. Physical Swiss Gold Shares ETF:This a newer gold bullion ETF, with over seventy million dollars in assets and has a ticker symbol of SGOL on the NYSE. 9. SPDR Gold Shares 10. Newmont Mining Corporation

Who Does control Gold Bullion Market Prices:Gold Bullion Market prices are only partially controlled by supply and demand, or gold buyers and gold producers. Gold bullion is a special type of commodity that is controlled by the spot price of gold and international financial interst rates. This is due to the fact that banks hold substantila gold assets and use them for hedging purposes, also lend and borrow them dependign on the market situation. Therefore market price of gold uses a more complicated dynamics model rather than a simple supply and demand curve. Government and major financial institutions policies and regulaitons have tremendous effect on the gold bullion market. London Over the Counter Market is the main financial hub for gold trading that plays a tremendous role in the establishing of gold bullion coins prices. New York Comex Exchange, Tokyo's Tocom Exchange markets are the largest gold trading establishments in the world that still end up clearing through the Lodon OTC market. It's fair to say that London gold fixing procedure plays one of the most important roles in gold bullion prices all over the world since major trades go through their system.The gold bullion market prices are calculated in three mjor world currencies namely USD, GBP and EURO.

Designated Bullion Branches by CBI:at 4 major metros i.e Mumbai, Delhi, Kolkata, Chennai. CBI is planning to strat the Bullion sales scheme from MUmbai main branch. Mumbai will be the pilot branch for sale of gold and dependign upon the response from this branch the expansion of this scheme in various other branch will be decided.

The main Cost incurred by CBI in purchase of Bullion Gold:1. Customs, Octroi, sales ta2. The margin of 0.75% to 0.95% will be loaded by the supplier and 0.20% to 0.35% will be loaded by the bank over the international pricing. x are additonal cost that will be paid by CBI. Process Flow of GOLD bullion sale in CBI:1. Selected branches shall place their requirement of gold bars in advance with International division of CBI for procurement of gold bars. 2. International Division should place the order as per the requirement given by the branches immediately for procurement and give the shipment of the gold procured directly to the selected branches. 3. Once the indent is placed by the bank it is irrevocable, so the bank should be careful in its operations of procurement.

Composition of Indent:The indent place by the bank in front of the suppliers of comprises of1. Quantity of gold to be imported from the suppliers. 2 Fineness of the gold desired. 3. Payment terms 4. Price Fixation--- by supplier

5. Delivery terms----Place and Date of delivery. 6. Invoice/ Packing Details 7. Account Number 8. Margin kept with the Bank 9. Declaration to be accepted and signed by the customer stating that indent is irrevocable.

Sale of gold will be made to customers on outright sale basis or on consginment basis. The supply of gold will be made by the bullion bank based on supply order issued by the designated bullion bracnhes.

Pricing of Gold:The customer will have the option of making payment or fixing up pricing of gold through the following methods:

A. Outright Sales:In the case of outright sale, price will be fixed on the on-going International market rate and recovered from the customer and simultaaneous payment will be made to the supplier bank.

B. Consignment Sale: In this case gold will be delivered to the customer against an margin of 110%. The customer will have the option to fix price within 11 days from taking delivery of gold. Once the price is fixed on the on-going international market rate, it will be recovered from the customer and remitted to the foreign supplier bank.

2. GOLD LOAN SCHEME:

In order to faiciltate the Bullion gold sale, CBI is also providing the Gold Loan Scheme. Through this scheme, CBI will mainly provide gold to the jewelers in Indian on an loan basis. In this scheme CBI will import Bullion Gold from the suppliers at an rate of 2% and will charge the jewelers with an interest rate of about 6%. The spread between 2% to 6% will be the earning of Central Bank of India. Objectives of the Gold Loan Scheme:1. To target gold jewelry manufacturers for providing gold metal loan at international prices/rates. 2. To broad base our operations in the related business segment. 3. To be competitive with peer banks in the business segment 4. To exploit oppurtunities of cross selling of CBI's Forex products to gold jewelry exporters.

Features of the Scheme:1. Elegibility:The jewellery exporters and domestic jewellery manufacturer must be in the manufacturing business and making net profit for the last 3 years. The existing loans, if any, should be in Stanford Category with an good track record of rerpayment.

2. Quantity of Loan:-

Minimum 10 kg gold (approx value of 3 crores) from the consignment stock received from the foreign supplier. One or more customers may join to avail Gold Loan of 10 kg at a time as per their requirements. However, the outstanding overdraft can be repaid by the borrower's by way of purchase of gold on spot/forward basis, with a minimum lot of 5kg at a time.

3. Nature of Finance:In respect of exiting borrowers, Gold laon to be provided under the scheme be carved out of the existing limit if the approval does not permit allowing credit facility beyond the existing limit. In case of new borrowers and over and above limit in case of existing borrowers, proper appraisal based upon turn over , reputation , oter parameters be made and limit be fixed accordingly. In respect of boorowers of other non-nominated Scheduled Commercial Banks,facilities be allowed in the shape of Overdraft/Demand Loan against the security of SBLC/BG issued by them

4. Maximum Period of Loan: a. For Jewellery exporter: - 90 days for manufacturing - 180 days for export realisation b. For domestic jewellery manufactures: - 90 days

5. Premium:

Based on the area of operation and quantity imported, foreign supplier of metal changes premium towards transportation and insurance cost of the metal. The premium varies from USD 0.50 per troy ounce to USD 1 per troy ounce and payable upfront. It should be advised by International Division.

6. Custom Duty:Customs duty as applicable from time to time

7. Sales Tax: As per Sales Tax Law applicable in the State. 8. Withholding Tax: Any tax deductions out of interst payments to foreign supplier will be borne by the borrower.

9. Rate of Interest: a.Up to 180 days: 4% over the interest rate charged by the supplier. b. From 181 days onwards, the rate as applicable to limit, if any, be charged. In case borrower has not be sanctioned any other limit, then 4% over base rate is to be charged.

10. Payment of Interest: a. Interest on gold overdrafts will be payable on monthly basis on the first business day of following month.+ b. Interest will accrue in USD on the daily outstanding balance of the gold overdraft based on 360 days year on average gold price basis.

c. The average gold price will be computed using the average of the London AM fixing price for the month. Interest on all gold overdrafts shall be invoiced by the supplier by the end of each month. Thus interest shall be recovered from the borrower at the agreed rate of interest.

11. Margin: 25% in cash or liquid security viz, FDR, NSC, KVP, RBI Relief fund etc

12. Commission: 0.30%, however it can be reduced using the discretionary power as under: -- GM: upto 1/3rd of 0.30% --CM: Full Powers

13. Repayment: a. The laon is to be ajusted within the maximum period of 270/180 days by the borrower. b. The outstanding overdraft can be repaid by way of purchase of gold on spot/forward basis with a minimum lot of 5kg. c. The forward contract shall be booked in respect of the underlying sale/purchase and loan transaction in gold for a minimum period of 180 days to hedge the price risk.

14. Lending Powers: Such loans to be sanctioned by AGMs/ ZMs and above as per their vested fund based powers. However disbursal of such loans can be made by the

branches designated by International Division keeping in view the potential existing in the area.

15. Exposure: Any gold loan borrowing/ or other non-funded commitment taken by the bank for the purpose of providing gold loan to domestic Jewellery manufacturer wil be taken into account for the purpose of overall ceiling prescribed by RBI in respect of aggregate borrowing for non-export purposes. The necessary record will be maintained by back-office at International Division.

16. Security: A. Loan to our borrowers: a. Before establishing limit, proper credit appraisal be made in this regard. b. Primary Security: Hypothecation of Gold/Jewellery c. Collateral: Minimum 50% of the loan amount in the shape of Mortgage of IPs and/pr any liquid security such as FDR, NSC/KVP, RBI Relief Bonds etc.

B. Loan to Borrowers of Non-nominated Banks against LC/BG issued by the,: The SBLC/BG shall be issued by Public Sector banks/ Banks approved by C.O in favour of our bank only. Its authenticity should be ensured as also that this is sufficient to cover at all times the full value of the loan.

17. Documentation: The client would be required to execute the Bullion Agreement under Gold Loan Scheme besides other stiplulated documents for securing credit

facilities. The draft bullion agreement shall be circulated to the deignated branches after getting approved from our Law Division. 18. Pre-Payment vis-a-vis Risk Mitigation: The gold borrowed by the bank from the supplier and lent to customers will have element of interest rate risk in case customer desires to repay the loan before maturity. In order to mitigate this risk, the bank will extend the gold loan scheme to the customers on back to back basis i.e on the same terms as stipulated by the foreign suppliers while lending gold to the bank.

19. General: a. Incumbents of the concerned branches should ensure end use of such gold loans and also adhere to KYC guidelines. b. Exposure in respect of loan against SBLC/BG of another bank will be deemed as an exposure on the guaranteeing bank and attract appropriate risk weight as per laid down guidelines. c. The transaction should be purely on back to back basis i.e bank should extend gold loan directly to the customer of a non-nominated bank against the SBLC/BG issued by them. d. Such gold loan should not involve any direct or indirect liability of the borrowing entity towards foreign suppliers of gold. e. While issuing/accepting such guaranteed, recommendations of Ghosh Committe and other precautions shall be adhered. f. SBLC/BG facilities are to be denominated in Indian Rupees only and not in foreign currency.

20. Accounting System / MIS: The accounting of gold sale and gold released on loan basis shall be done in

the books and brought to CBS platform before implementation of the scheme. Proper MIS will be kept by Back Office, Integrated Treasury Branch at International Division, Central Office, Mumbai.