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All that glitters is not gold...
“The exponential growth in balance sheets of NBFCs engaged in lending against gold in recent years, coupled with the rapid rise in gold prices along with expansion in the number of their branches could be a cause of concern,” commented the Reserve Bank of India in its Financial Stability Report, Jun
THERE ARE ENOUGH reasons to be concerned about the unprecedented surge in the demand for gold. In 2011-12, 854 tonnes of gold worth US$ 45 billion (Rs 247,500 crore) have been imported to meet the growing demand for gold. Gold imports constitute as much as 10 per cent of total imports. 

The yellow metal has suddenly become an attractive physical asset, leading to the diversion of the house-holds’ savings from investment in financial assets to physical assets. This is evident from the increase in the number of jewellery shops in most of the cities. Besides the traditional goldsmiths and the posh jewellery shops, banks also have started selling gold coins. “Banks’ import of gold coins for retail sale has been a matter of concern. It has risen from one per cent of total imports in 2009-10 to 3.8 per cent in 2011-12,” the report has cautioned.

Gold advances

In a study of gold advances in rural branches of banks undertaken by me over three decades ago, the seasonality in the demand for gold advances by small farmers was found to be quite evident. Pledging their gold orna-ments, farmers used to borrow before the harvesting season and redeem them after harvesting. That was a simple hassle-free method of borrowing from banks, for those who could not offer any other asset as security. After nationalisation, many of the banks shunned gold advances. Of late however, gold advances are emerging as an important part of the credit portfolio of banks.  Banks are offering gold advances with much publicity in the city branches too. While the details of the total gold advances made by banks are not available, those made by non-banking finance companies (NBFC), which are a major source, are emerging as a major chunk of institutional credit. The total gold loans of NBFCs have increased sharply from Rs 54.80 crore at end of March 2009 to Rs 44,510 crore at end of March 2012.

The regulator’s concern about the fast growing gold advances is ex-pressed in the report as: “With more than 90 per cent of the loan assets being collateralised by only one product viz., gold jewellery, the business model of gold loan companies has inherent concentration risks. The risks, however, would materialise only in case of a steep adverse movement in gold prices. The business model of the gold loan companies is driven by borrowings, of which, bank finance forms the major component and is increasing at 
a fast rate. Any adverse development in recovery by these NBFCs or an adverse movement in gold prices may have a spill-over impact on the asset quality of the banks.”

Going further the Report mentions about the regulatory steps initiated: “This growing inter-connectedness of gold loan companies with banks was sought to be addressed through recent regulatory measures viz., the de-recognition of priority sector status of bank finance to NBFCs for on-lending against gold jewelry and through the prescription of a lower exposure limits on bank finance to NBFCs.

Actions needed

One way of curbing the demand for gold would be by restricting the banks in facilitating the sale of gold coins. Banks, including the new generation banks, have been aggressively marketing gold coins, by forcing their customers, particularly during Akshaya Thrithiya, to buy the glittering gold coins. Selling gold coins is not the core competence of bankers; it is jewelers’ job, leave it to them! 

Reducing the import of gold is the need of the hour. The Union Govern-ment is reluctant to curb the import of this unproductive item. Make those who love the yellow metal to pay to the national exchequer a price for their insatiable love for the glitters.

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