Liquidity issue hits jewellery sector as gold price tumbles

Prices fall to 4-year low, cause inventory values to decline; trade complains of banks again cutting lending for fear of more NPAs, ask for govt help

The steep fall in the price of gold has meant a revival of a liquidity problem for the Rs 2.5 lakh crore gems and jewellery sector, with banks gradually started to seny

Gold fell on Wednesday to a four-year low of Rs 25,110 per 10g at Zaveri Bazar here, the bullion hub, Rs 290 lower than Tuesday. It was the lowest since August 2011. In the international market, gold was trading continuously below $1,100 an oz. Silver fell by Rs 250 a kg and the closing price of Rs 34,350 a kg was the lowest since October 2010.

Gold has been falling abroad for days, on strengthening of the dollar. The slide is mainly attributed to a global spillover, where broad-based commodities bore the brunt of investors' panic selling recently, amid a flash-crash worldwide.

Even SPDR, the largest global gold exchange-traded fund, has seen sharp selling. In four trading days, its holding fell almost three per cent to 689.7 tonnes on Tuesday.The price of gold has fallen 27 per cent in nine months, from Rs 34,000 per 10g.

“The steep fall has created fresh pressure on bullion dealers and jewellery manufacturers. This sector has already been under severe stress for four years, due to unfavourable government policy. Banks have denied lending as fear mounts on fresh NPAs because of a fall in gold prices,” said Mohit Kamboj, president of India Bullion and Jewellers Association (Ibja).

He said State Bank of India has barred bullion dealers from the gold replenishment scheme for a year. Other banks have kept gems and jewellery under a watch list for credit extension. Of an estimated Rs 250,000 crore estimated credit of ball banks accumulatively, around 50 per cent is feared to be under NPA. Another 25 per cent of overall credit is under severe stress.

According to Kamboj, large bullion jewellers are under severe stress, despite having comfortably hedged for their gold price movement, due to fall in the value of their inventory in proportion to the decline in gold prices. In contrast, small players are safe, as they buy gold up to their daily estimated sales.

Ibja has urged he government to scrap its ‘80:20’ gold import rule and to withdraw gold import licences from star trading houses, saying they play a low margin game to raise their volumes, to maintain their status as a star house. Instead, he said, allow gold import only through public sector banks, to regulate sales in an orderly manner.

“Three years ago, the government revised interest rates (for lending to us) to the normal corporate rate of 18 per cent from a mere four per cent. Additionally, three per cent of other costs a jeweller will have to pay. The rate is only three to four per cent in competing countries. There is a need for the government to take special interest in the gold jewellery industry for its revival,” said Kamboj.

He said he expected jewellery sales in the peak Diwali season to remain lacklustre, with a 40 per cent decline from a year before.