NRIs in UAE: Is it wise to buy gold and store at home?

Question: My relatives keep advising me to invest in gold and silver in India as the prices keep rising steadily though there may be dips from time to time.  I need some clarity on this as I am quite inclined to accept their advice, though the thought of keeping physical gold in a house deters me.

ANSWER: Your concern about keeping gold or silver in physical form is well founded.  However, you can gain exposure to these metals via exchange traded funds (ETFs) or fund-of-funds (FoFs) c. If you decide to invest in them, you will receive units based on the scheme’s net asset value (NAV). These funds hold physical gold bullion and silver and therefore the NAV moves in line with the metal’s price.  This will give you indirect ownership without holding the metal.  In addition to ETFs and FoFs, some fund houses offer multi-asset allocation funds that invest 10% to 25% of their portfolio in gold and silver. These multi-asset allocation funds give investors indirect exposure to gold and silver along with equities and debt, which results in diversification and automatic re-balancing.

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Investors are free to choose systematic investment plans or systematic transfer plans in addition to lump sum investments.  Further, there is no limit on the amount which you can invest in these metals through mutual funds. The appreciation in the value of gold and silver has been quite impressive for the last three years, gold delivering an annualized return of around 33% and silver around 49%.  The tax treatment on sale of gold and silver ETFs is quite benign because gains from ETF units sold after they are held for more than twelve months attract long term capital gains tax at the flat rate of 12.5%.  If you sell these units within the twelve month period, the short term capital gains will be taxed at the normal rate applicable to your income slab.

Question: Is the financial health of Indian banks being adequately monitored by the Reserve Bank of India?  What steps are being taken to mitigate risks?

ANSWER: In recent years, the Reserve Bank of India’s capability of assessing asset quality of banks has improved substantially. The regulator’s offsite monitoring with advanced data analytics has ensured that risks are kept in control and the financial health of banks is closely supervised, enabling early detection of stress in asset quality, liquidity and capital. RBI has stressed on stability and encouraged banks to view supervisors as partners in resilience.  According to the Governor of RBI, enforcement of regulations should be treated as being corrective in nature so as to safeguard the interests of customers of banks. The RBI’s department of supervision is putting in place stronger analytics and supervisory dashboards for enhanced offsite surveillance in order to support continuous monitoring and ensure early risk detection.

In fact, RBI has collected vast amount of data updated by banks through platforms provided by it. RBI has also been conducting onsite supervision of bank records largely through annual financial inspections under a risk based supervision framework which focuses on core areas like capital adequacy, asset quality, management, and earnings liquidity. However, the emphasis has now shifted to offsite supervision which helps faster risk identification and resource optimization.  This is being done by sustained efforts based on tech driven analysis, improved data integrity, and quicker RBI interventions. 

Question: Are small and micro enterprises getting loans for their business operations? I am told that commercial banks are wary about extending credit to small merchants.

ANSWER: It is true that banks are careful about lending to merchants belonging to the unorganised sector as they have to comply with stringent regulations.  However, non-banking finance companies (NBFCs) are extending credit to small businesses, harnessing the technology backbone offered by payment firms such as Bharat Pe, PayTM and Phone Pe. As sourcing partners for these NBFCs, the payment firms are paid a commission for each loan.  Around Rs.10-15 billion are disbursed every month by way of loans to small merchants and shopkeepers.  NBFCs are happy to offer these loans to fintechs as they have a low delinquency rate due to the practice of daily repayment of installments. 

In theory these small ticket loans are unsecured as per guidelines of the Reserve Bank of India.  However, daily repayments of installments using the QR Code by merchants ensures that defaults can be detected and remedial action taken immediately. Most of the small and micro enterprises are pre-approved for a specific loan amount. Therefore, disbursal is fast and daily repayments are monitored on real time basis. As a result, business loans to small and micro enterprises are increasing by 25% year on year. Most NBFCs are earning substantial revenue and profits from small merchant loans which vary from Rs.100,000 to Rs.1.5 million with a credit tenure of six months to four years. The payment companies have deployed large field staff to service these merchants which has created employment opportunities for thousands of young entry level job seekers.

The writer is a practising lawyer, specialising in corporate and fiscal laws of India.