Banks forced to import gold when available at a 2% discount locally

The more than a dozen banks nominated for importing gold are being forced to buy the metal from abroad for lending it to jewellers at a time when it can be purchased at a discount from the domestic market.

In the Mumbai market, gold is trading at a discount of over 2 per cent compared to the international price or cost of import. However, banks are not allowed to buy gold in India because of restrictions put by the Banking Regulations Act. They can only sell or import gold on behalf of users and traders after permission from the Reserve Bank of India (RBI).

In Mumbai’s Zaveri Bazar, standard gold was trading at around Rs 37,500 per 10 gram on Friday, Rs 1,000 lower than the cost of import. Discount per ounce comes to over $40 and that is the price banks are paying for not being allowed to source gold from domestic refineries. Discount varies in various cities but it is over 2 per cent.

Jewellers and traders directly buy gold from the local market whether it is imported or sold by domestic gold refineries. MMTC PAMPS is the only LBMA-accredited refinery in India which sells the yellow metal that matches standards of imported gold. However, “banks cannot buy from either of these,” said an industry official. 

Since the past two months, gold is trading at a discount in the domestic market following the high price not seen in the last six years, absence of demand and rise in inflow of illegally imported gold after increase in import duty to 12.5 per cent. In the Mumbai wholesale market, discount to cost of import is over $40 or over 2 per cent. Banks cannot even buy gold from the exchange platform.

“It will be a good practice to allow banks source gold locally. Domestic prices are quoting at over 2 per cent discount to the landed cost. The market will also even out if banks source locally,” said Shekhar Bhandari, senior executive vice-president and business head - global transaction services and precious metals - Kotak Mahindra Bank.

India’s Gold Policy Center (IGPC), under the Indian Institute of Management, Ahmedabad (IIM-A), has said in its latest annual report that “there is need for amendments and clarifications in the Banking Regulation Act. IGPC has proposed a much larger role for banks in developing the bullion market. 

The amendments would allow banks to source locally, do inter-bank dealings, export bullion, transfer ounces to the counter party international bullion bank and allow opening of unallocated accounts. It would also allow trade in dematerialised gold, hedge in domestic and international exchanges and finance refiners by sourcing dore.

Allowing banks to do local sourcing of gold that meets the standards will help solve many issues. It will force banks to import gold at a price higher than the rate sold by refineries in India in a period when the domestic market is at a discount.