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

More than a dozen banks nominated for importing gold are now being forced to buy the metal from abroad for lending it to jewellers, at a time when it can be bought at a huge discount in the domestic market.

Gold in Mumbai’s Zaveri Bazar market is currently trading at a discount of over two per cent to the international price. However, banks are not allowed to buy gold in India due to restrictions imposed by the Banking Regulations Act. They can only sell gold or import on behalf of users and traders under permission from the Reserve Bank of India.

Standard gold opened at Rs 37,478 per 10 grams in Zaveri Bazar this morning, about Rs 1,000 lower than the price of imported metal. The 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.

Jewellers and traders directly buy their requirements from the local market, whether imported or domestic. MMTC PAMPS is the only LBMA (London Bullion Market Association)-accredited refinery in India which sells gold that matches international standards. “However, banks cannot buy from them either,” said an industry official.

“It should be good practice to allow banks source gold locally when domestic prices are quoting over 2 per cent discount to landed cost. Market will also even out if banks can source locally,” said Shekhar Bhandari, Senior Executive Vice President and Business Head-Global Transaction Services and Precious Metals, Kotak Mahindra Bank.

The metal has been trading at a discount in domestic market two months, due to the absence of demand after it hit a six-year high. There was also an inflow of illegally imported gold after import duty on the metal was increased to 12.5 per cent. In the Mumbai wholesale market, the discount to import price is more than $40 or over two per cent.

Banks use gold for lending to jewellers at an interest rate of 3.5-4 per cent. The market for such lending, known as gold metal loans, is estimated at 120-130 tonnes a year, and at any given time half of the loan values are outstanding. Banks, however, can not buy this gold from MMTC PAMPS or any other refineries, which also have to sell gold at prevailing discount.

These refineries also sell gold on MCX, the most liquid derivative platform for bullion trading. This is because when the spot price is at a discount, if the MCX prices are quoting at premium, the refineries get higher realisations. In a contract settled on August 5 on MCX, over five tonnes of gold were delivered, which is not usual. Of these, four tonnes was delivered by MMTC PAMPS.

Banks, however, had to continue importing. Jewellers also have to borrow gold from banks only.

India Gold Policy Center under the IIM-A has said in its latest annual report that there is need to for amendments and clarifications in the Banking Regulation Act. IGPC has proposed a much larger role for banks in developing the bullion market and the amendments shall be such that allows, “banks to source locally, do inter-bank dealing, export bullion, transfer ounces to the counter party international bullion bank, allow opening of unallocated accounts, trading in dematerialised gold, hedge in domestic and international exchanges and finance refiners by sourcing dore”.

Source: Business Standard