Banks reworking gold import regime

Imports in June and July expected to be much lower then May's 162 tonnes; could rise once new supply system in jewellery trade is in place

Gold imports in June had been estimated at 37 tonnes and that in July at around 40 tonnes, compared to May’s 162 tonnes. Imports in June 2012 were around 25 tonnes and in July 2012 at a little around 65 tonnes. According to World Gold Council data, imports were 223 tonnes in the July-September quarter of 2012.

Gold imports took a hit after the Reserve Bank (RBI) disallowed banks from importing on a consignment basis for domestic market and the central government raised the import duty further by two per cent. That and the falling rupee had not allowed any benefit of the fall in international  prices to Indian customers, leading to a lull in demand.

RBI’s latest measures have destabilised an age-old supply chain,as import on a consignment basis meant the importer did not have to make a payment to the seller till the gold was sold here. Banks used to lend the imported gold to jewellers who were just paying interest. The loan deals were settled in cash after a few weeks.

This system is being reworked. The erstwhile gold importing banks plan to enter into an arrangement with those abroad for buying gold under an annual contract. Indian banks will assure lifting of a certain minimum quantity in a year. One option being considered is buy gold on consignment basis and to keep it in places like Dubai, where vault charges are lower, and bring to India by paying full money when required. Banks having such an infrastructure abroad would find this viable. Imports might rise again after the new arrangements are in place, said a sector official. Demand also improves after mid-August, when festival buying begins.

“At present, agreements are being negotiated and that will restrict July imports,” said an official. A couple of banks active in gold import have started lending it to jewellers, at premiums high enough to cover finance and loan charges. Sources said the charge is $11-12 an ounce. These banks have paid full cash margin for the import; hence, this isn’t illegal but “it flouts the spirit of the RBI circular. If not stopped by RBI, many more will start doing this and curbing gold import and demand will be difficult”, said a veteran bullion analyst.

Jewellers have a different view. If paying a few premiums, jewellers start getting gold on loan, they will get back confidence to make more jewellery. An officebearer of the All India Gems and Jewellery Trade Federation said, “This is a good development for jewellers, as even the finance ministry official told us in our meeting that their intention is not to disturb the employment-generating jewellery industry. They just wants to curb trading and investment in gold.”
QUICK STEPS

• Importing agencies finalising new strategies after the ban on consignment imports
• Banks planning to sign annual import contracts with overseas sellers
• Some banks start lending gold to jewellers after importing it by paying full cash
• Lending charges are collected in the form of higher premiums