Ban Imposed On Loan For Gold, Efforts to Reduce Import of Gold

An excellent contribution by S.Srinivasan

The sharp rise in gold imports has the Reserve Bank worried. The central bank had earlier expressed its concern over the sharp rise in gold imports which led to the widening current account deficit. It had even clamped down on gold loan companies by restricting lending. The government supported this by a hike in the import duty of gold.

"An inch of time is an inch of gold, but you can't buy that inch of time with an inch of gold." Does this Chinese proverb ring true in the case of Indians who invest in gold for a 'good time' tomorrow? 

Or is the craze for the yellow metal ruining the country's economy?

Time and again, the government, economists and experts have ridiculed Indians' obsession with gold and pointed out the need to curtail imports of the yellow metal to improve trade deficit.

Indians are irresistibly attracted to gold - either to be bought as ornaments or investments. Their fascination with gold jewelry has roots in the culture, tradition and also the economic realities at the rural and grassroot levels of the society. 

As an investment, gold has been an easier bet to hedge against inflation and other risks. Indians have been buying and trading in gold since time immemorial, and continue to buy even now, at a time when it is more expensive than ever.

The government and experts believe that high gold imports are fatal to the economy. If India were to reduce gold imports, it could solve the country's economic problems, erase the current account deficit, appreciate the rupee and boost growth. 

Experts say the country's balance of payment (BOP) is negative because of the gold imports.

Quantum of import of gold ... is a clear indication (that) large section of community...want (to) investment in dead asset only with expectation that value would appreciate. There is a need to spread financial literacy to encourage people to invest in market instruments" and dissuade them from investing in gold.

The government believes the common man can easily save the country's faltering economy by sacrificing his passion for gold.

However, those Indians who have spent their fortunes on gold and a section of analysts beg to differ. They say although gold imports affect the country's BOP position in the short-term, India's gold reserves will benefit the people and the country in the longer run. They feel there is no basis in the saying that gold is an idle asset. From investors' point of view, gold is not an idle asset

. Quick Facts About India's Gold and Economy

• India is the world's largest importer of gold. India accounts for nearly one-third of the total world demand for gold. India's gold imports were higher than those of twelve of its states' GSDP in the year 2010-11.
• Gold's share in total import bill of the country has gone up from 8.1 percent in 2001-02 to 9.6 percent in 2010-11. The average rate of growth of gold imports in the last three years was 26.8 percent. At this rate, the gold import bill will be approximately $100 billion by 2015-16.
• According to a World Gold Council report, India has savings rate of approximately 30 percent, with 10 percent of this being in gold. It says that gold reserves in India, both with private and government, were around 20,000 tons at the end of 2011 and it is worth roughly Rs 54 lakh crore, which is 60 percent of the nominal GDP of India in 2011-12.
• Gold import value for the year 2010-11 was higher than the budget-estimated expenditure on Urban Development, Housing, and Family Welfare for the year 2010-11.
• According to the Gold Council report, gold jewelry accounted for about 75 percent of the total Indian gold demand in 2009, the remainder being investment (23 percent) and decorative and industrial use (2 percent).
• Requirement for gold in India depends upon the seasonal demands in the country, such as weddings and festivals, and not on the highs and lows in the international prices. So people tend to buy gold at whatever the price may be in these seasons.

India imported 963 tonnes of gold in 2010 and another 878 tonnes of gold in 2011. A part of these imports was abetted by banks.Gold coins sales at banks rose 33% in 2011 to 18 tonne as against 13.5 tonne in 2010.

 Read Also

http://www.assocham.org/arb/general/Indias_Gold_Rush_Its_Impact_and_Sustainability.pdf

http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=154100&sn=Detail&pid=34

SBI, ICICI, HDFC Bank, Bank of India, and Indian Overseas Bank accounted for 70% of gold-coin sales in India. Bankers say that selling gold coins contributing marginally to income.

Banks are estimated to make a profit of Rs 150 crore at a 3% of margin from sales of gold coins. But the Reserve Bank is of the view that the sale of gold coins is not a bank's core business and hence plans to phase it out.

There is another view as rightly mentioned in your ‘eye opener’ article that the role of banks is to convert savings into investment and promote economic activity. Selling gold coins therefore is not in line with the role of banks. 

Economists, concerned about India's current account deficit, argue that Indians are importing gold at a time when gold prices are too high in the international market. Since India depends on imports to meet more than 80 percent of its gold requirement and gold as a commodity on its own, it doesn't add much to the economic productivity. "We have to pay in dollars to buy gold. A huge part of our forex resources which could have been used to import productive goods are wasted on it  .

Most gold is in the form of ornaments with the private people in households or are piled in bank lockers for most of the time. Gold doesn't have economic value; it only has emotional value. And considering the heavy pressure its puts on imports, it is an investment better avoided.

Experts also warn that it is unscientific to buy gold at current rates as the prices are high but show symptoms of declining. Moreover, they say that money squandered in gold should be used for productive purposes within the country, considering the extent of poverty and lack of social infrastructure in India

S.Srinivasan

President

NUBE

Appending below the articles in news papers:

RBI bans bank loans to buy gold INIDAN EXPRESSTue, 20 Nov 2012

The Reserve Bank today directed banks not to give loans for purchase of gold in any form, including primary gold, bullion and jewellery, to dissuade people from indulging in speculative activity.

"...it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds," RBI said in a notification.

No advances should be granted by banks against gold bullion to dealers or traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions or speculative holding of stocks and bullion, it said.

However, it said banks can provide finance for genuine working capital requirements of jewellers.

The decision was taken in view of significant rise in imports of gold in recent years putting pressure on current account deficit.

In the 2011-12 fiscal, India's gold imports stood at USD 60 billion and the quantum of import was 1,067 tonnes.

In the April-June quarter of the current fiscal, however, gold imports had contracted by 18.4 percent year-on-year to Rs 71,912 crore (USD 13 billion).

The Monetary Policy Statement of April 2012 announced the constitution of a Working Group to study issues relating to gold imports and gold loans by Non-Banking Financial Companies (NBFCs) in India.

The Working Group, submitted its draft report in August 2012, suggested that other than working capital finance, banks are not permitted to finance purchase of gold in any form.

The Reserve Bank today directed banks not to give loans for purchase of gold in any form, including primary gold, bullion and jewellery, to dissuade people from indulging in speculative activity.

"...it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds," RBI said in a notification.

No advances should be granted by banks against gold bullion to dealers or traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions or speculative holding of stocks and bullion, it said.

However, it said banks can provide finance for genuine working capital requirements of jewellers.

The decision was taken in view of significant rise in imports of gold in recent years putting pressure on current account deficit.

In the 2011-12 fiscal, India's gold imports stood at USD 60 billion and the quantum of import was 1,067 tonnes.

In the April-June quarter of the current fiscal, however, gold imports had contracted by 18.4 percent year-on-year to Rs 71,912 crore (USD 13 billion).

The Monetary Policy Statement of April 2012 announced the constitution of a Working Group to study issues relating to gold imports and gold loans by Non-Banking Financial Companies (NBFCs) in India.

The Working Group, submitted its draft report in August 2012, suggested that other than working capital finance, banks are not permitted to finance purchase of gold in any form.