Introduction to Session 2: The Need for …some concurrent steps are taken, efficiency in the...

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003 Page 25

Introduction to Session 2: The Need for Development of the Indian

Bullion Market

Rajan Venkatesh

The Indian Bullion Banks Association

The gold reform process in India traces its origins to the early 1990s, which saw the balance of payments crisis. The government’s gold policy over the last three decades has been guided by its economic philosophy in general as well as external trade pressures. The policy was based on the broad achievement of a general reduction in the demand and appetite for gold, a change in the savings pattern of the population into other types of investments, stopping gold smuggling and the conservation of foreign exchange, which was regarded as a precious commodity.

In retrospect, very little of the above has been achieved. There are different schools of thought on the reform process and its basis. One is cautious optimism, favouring an approach that would see the government and central bank proceeding in a slow and careful manner. The other view is that the current pace is too slow and needs to be hastened so that the parts of the reform process are not hindered by antiquated regulations and procedures, which in the present day context have, perhaps, outlived their usefulness. ■

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003 6


Prospects for Forward Trading of Gold and Silver

DS Kolamkar,

Director, Forward Markets Commission

The prospects for bullion are very uncertain. And, unlike in the case of UK, for example, where there is one organisation which regulates the financial markets, securities and commodities, in India, there are three regulators – the RBI for financial assets, the SEBI for capital markets and the Forward Markets Commission (FMC) for commodities.

Another aspect of this regulated framework is that, as far as commodities are concerned, the government is the main regulator and the FMC is the relevant authority as far as forward markets and commodities are concerned. It is expected to play the role of self-regulation as far as possible. Therefore, under the present legal framework it is the government of India, which has to either allow a commodity to be traded in the forward market, or, prohibit it from being traded.

As far as bullion is concerned, gold trading was prohibited on 13 and 15 of November 1962. The relevance of these two dates is that the long-term merchandising contract also constitutes a forward contract. The futures contract was prohibited on 13 November 1962.

As far as silver is concerned, the Indian government prohibited both the long-term merchandising contract and the futures contract on 9 January 1963. Thereafter, futures trading in the Indian market has not been permitted.

Nevertheless, those who were trading in these markets are reported to have continued to trade unofficially in silver futures, from important centres like Delhi, Indore and some of the centres in Rajasthan. Some raids have been carried out, which have found documents showing illegal forward trading at those centres. This shows that there is a potential demand for forward trading in bullion.

Returning to the developments in the bullion market, a committee was appointed in 1984 under the stewardship of an eminent professor, A.N. Khusro, who, having consulted various trade bodies, made a recommendation that forward trading in silver could be permitted on an experimental basis. After reviewing the performance of forward trading in silver over a period of about six months or so, the government could then consider whether forward trading in gold could be permitted or not.

In 1994, in the context of increasing liberalisation and globalisation, another committee was set up under the chairmanship of Professor Kamalnain Kabra. This has become known as the Kabra Committee Report. The chairman, Professor Kabra, recommended in the case of bullion that, at that time, there was no need for forward trading in bullion. These recommendations have resulted in a delay in devising futures trading in bullion.

Nevertheless, the FMC took the initiative in 2000 to review the entire situation and asked the RBI for its comments on revising futures trading in bullion. The RBI formed an internal committee and created a roadmap for futures trading in bullion. However, the roadmap was sequential. The RBI stated that, in the first instance, the physical market had to be widened and deepened. Thereafter, the setting up of a proper risk management system could be considered, and, following that, futures trading in bullion could be considered. However, the recommendations of the internal committee were not endorsed officially by the RBI.

The FMC wrote to the Indian government requesting that it consider allowing futures trading in bullion in consultation with the RBI, and as of now, the Indian government is in consultation with the RBI on this matter.

Prospects for Forward Trading of Gold and Silver D.S. Kolamkar


The FMC takes the view that it may not always take the sequential route because it is quite possible that if some concurrent steps are taken, efficiency in the physical market of bullion could improve, but some calculated risks need to be taken.

We understand that the government is debating whether it should opt for a big-push approach or an incremental approach, as we go through the reform process. One school of thought is that all it takes is just one scam in any particular issue to set the process back by about 10 years. Therefore, instead of moving quickly, it is better to take a cautious approach to the entire issue.

Another view is that there are still a large number of agricultural commodities that are still on the list of prohibited commodities. These need to be given priority and need to be liberalised first before considering allowing futures trading in those commodities. ■


Bullion Market Reforms – The Viewpoint of Commercial Banks

Sunil Kashyap

Managing Director, Scotia Mocatta

I will look at bullion market reforms essentially from the viewpoint of a local commercial bank, or a commercial bank operating locally. The Bank of Nova Scotia has five branches in India and operates as a local commercial bank supplying bullion and bullion products to customers in India. The Bank has been operating in India for five or six years, ever since the 1997 reforms.

Although India is the leading importer of physical gold and silver in the world, it plays only a very insignificant role in global markets in either jewellery or bullion trading. The predominant reason for this is that any regulation that has been brought out regarding deregulation, or reforms, has been piecemeal, and has included several conditions that only serve to hamstring the banks operating in this environment.

In order for a deep and developed bullion market to operate in India, it is essential that the commercial banks operating in the market are allowed to offer the products and services that similar commercial banks across the world offer. Once India builds a strong domestic bullion market, it will be the building block for India to play a more dominant and substantial role in the international bullion markets.

Some of the constraints, under which commercial banks operate, in the first instance, concern the provision of domestic gold loans to jewellery companies or to traders in the local market. While gold loans are allowed to a small segment of the market, banks must meet several conditions. For example, they can only finance or fund these loans through gold deposits. The gold deposit scheme that was launched by the State Bank of India and other banks has been notable in its failure to mobilise more than seven tonnes of gold. Given that fact, any bank operating in India is essentially constrained because they cannot provide the liquidity that the market needs to upgrade. In any developed market the provision of gold loans is a very basic building block for the market to operate and, unfortunately, that building block is not available in the Indian environment.

Secondly, although the RBI has allowed spot trading and, to some extent, forwards trading, there is no real depth in the inter-bank market. Indeed, there is no inter-bank market for spot or forwards. Once again, the reason why there is no liquidity or depth in these markets is because the regulations and conditions surrounding these particular products are either unclear, or, the conditions are so extensive that they inhibit the provision of these products to customers at realistic prices and at a realistic level of service. Clearly, that is of concern to banks like us; although we can offer a product, we can’t offer it in the same way as it is offered internationally, or, in some cases, as can be offered by trading companies in this environment.

Thirdly, in order to operate in the physical markets, a bank needs to be able to provide a two-way price for both selling and buying gold. Unfortunately, although several banks are willing to do so, the problem is that in the absence of assaying and refining facilities of international standard being available across India, it becomes extremely expensive and risky to provide such a service. Therefore, without such facilities, a large part of the market has remained untapped or inaccessible to commercial banks, especially at a time when the gold price is so high.

A fourth constraint for banks is that gold is considered very much as a physical commodity. All the regulations and procedures are structured in such a way as to treat both gold and silver as physical commodities, and associated with that are customs duties, sales tax, and other taxes and levies.

The Viewpoint of Commercial Banks Sunil Kashyap


It is important that the regulators and authorities, which make policies, understand that gold has a financial aspect to it and that they should permit banks to look at the metal as a financial commodity, and allow the trading of gold and silver without the requirement for capital gains, taxes, or sales tax issues or prices issues etc. It is because of gold’s unique financial aspects that international bullion markets have been able to flourish without the requirement of physical movement.

Unfortunately, that factor has not been available in India. To summarise what has been happening to commercial banks in India, they have been straightjacketed into providing a certain set of services that are more focused towards the physical market, associated with the importing and selling of metal. So, in effect, they have turned out to be brokers rather than banks. For the market in general this has meant that it has had to go elsewhere to get its products or services or hedging facilities, without having the ability to go to the commercial banks and the local market.

And associated with that situation is the fact that practices have flourished which have created problems for commercial banks dealing in physical metals. As was mentioned earlier, there have been problems in markets like Jaipur, Ahmedabad and Bombay in the past due to this straightjacketing because of the inability of commercial banks to provide the services that can manage risk for the customer.

There are changes that could be made in the regulatory environment that would allow the proper functioning of commercial banks in this market. The first important aspect from our point of view is that banks be permitted to provide gold loans in the domestic market. It is feasible and possible for local companies to borrow dollars or yen or euros from overseas for a six-month period, but for some reason they are not allowed to borrow gold locally through commercial banks. That’s something that needs to be addressed and would allow this market to have much more depth, reduce the amount of market risk suffered by customers and, also, enable cash flows to become much more efficient.

Secondly, an important element of creating a strong bullion market is to create an inter-bank market in spot and forward. One of the biggest constraints for banks dealing in the inter-bank market is that the gold is still looked at as a physical commodity and there are taxes associated with it, which would not exist if it were treated as a financial asset. It is important that this is addressed and a very vibrant inter-bank market is created.

Thirdly, there should be an avenue available that would allow scrap bars or gold to be exported. After all, there is a lot of liquidity in this market, and if there is metal available, there is no reason why, if gold can be imported, that it should not be able to be exported.

Once these basic building blocks are in place, paper-based products for investment and retail savings will come on to the market. Associated with that, refining capabilities and assaying facilities would need to be set up. Although refining capacity is being set up, it is still in the infancy stage. It is important for the regulators to allow an open-door policy for international assayers, so that there is a two-way market for commercial banks rather a one-way market. ■


The Viewpoint of a General Trader

Anand Trivedi

General Manager, West Zone, MMTC

India is the largest importer for gold in the world. Since 1987, MMTC has been deeply involved in the bullion business. Historically, bullion has been under many regulations; tight regulations that are still in place today. Prior to the gold control act, up until 1990, MMTC was allowed to supply gold to exporters and, during that period, gold loans were made available for the first time. It is a matter of pride that since then much of the gold in the market has been made available by MMTC, and jewellery exports would not be at their current level without MMTC, even though India is still a very small player in exports of jewellery.

Although India is a small player in exports of jewellery, the development and availability of gold loans at that time played a very important role. MMTC’s gold supplies began in Delhi and subsequently at SEEPZ, Mumbai. A number of the big units flourishing today grew, literally, with the help of these gold loans and working capital, which was provided by MMTC.

NRI imports, of course, were introduced in 1992. In 1994, special import licenses, which were issued to exporters were allowed to be used for the import of bullion, both gold and silver, and this resulted in a big increase in the volume of imports in 1994 and thereafter. Then, 1997 saw an introduction of licenses, to import and sell bullion to a large number of banks; initially I think 13 licenses were issued.

The standing committee of the RBI on precious metals had been discussing this issue for a long time. The main concern when these banks were licensed to supply gold was the shortage in the supply of gold to exporters. Domestic trading was not really an issue at that time. The standing committee had recommended that as many agencies or banks, as possible, should be allowed to import and supply gold to exporters. However, at the same time, the banks were also permitted to trade domestically, and there were a number of banks which didn’t supply any gold to exporters, although that was the main reason that they have been given licenses.

Of course, banks are not allowed to give domestic loans so far, except from their gold deposits. MMTC does not have that restriction and, since 1997, MMTC has been providing domestic loans. It has also met the working capital requirements of jewellers and, as a matter of fact, that is probably the only hedging mechanism available today to jewellers.

We have heard recently about the prospects of forward trading, which do not seem to be very good, but there is a need for forward trading - not speculation - as security for traders and jewellers, who are exposed to price risks. The violent fluctuations in prices seen over the past few months have created problems, and forward trading would be a good tool to deal with these. Hedging, of course, is allowed, but proper information, or, the dissemination of information is not available, and the usage of hedging has yet to start. It is another way to insulate market players from rising prices or price fluctuations.

Something like a gold mutual fund is definitely required in India, and there is a pressing need for pushing reforms in this area and educating people on the use of these kind of products.

An important role played by the jeweller today is of a trader, a manufacturer, designer, repairer and valuer. This varied role was recognised by MMTC a long time ago, and it tried to provide these services to its customers. It started hallmarking in 1988, followed by the manufacture of medallions and coins, and got into jewellery - selling jewellery domestically. MMTC made sure that every product passing through its hands was assayed and hallmarked.

Viewpoint of a General Trader Anand Trivedi


Another action taken by the standing committee on precious metals of the RBI in 1997 was in relation to hallmarking. It was decided that this work should be given to the BIS, and MMTC actively collaborated with the BIS. MMTC’s existing hallmarking facility in Delhi was made a model for assaying and hallmarking. It is unfortunate that hallmarking hasn’t developed the way it ought to have but efforts are still on.

World-class refining facilities are not available in India. There are some refineries set up but they are not really working the way they should. The total lack of this type of service all over India, which is required for the development of bullion trading, is another area that will have to be looked at.

With regard to the problems of traders, which also includes commercial banks, most of the bullion traded is on a cash basis, and it results in large volumes of cash being moved about. There are always problems of depositing the cash by customers into bank accounts, and this has created a bottleneck. There are times when a sale is effected and large amounts of cash have to be deposited and it obviously has to be paid to the foreign supplier, but traders are not able to do so because of restrictions of the banks and the problems in handling cash.

Customs duty is under the auspices of the Federal Government in India, and the provincial governments have their own taxes. Of course, there is a lot of talk about VAT being implemented in India, with the same rates applicable all over the market in all the states. Hopefully, that will take care of this problem, but at present imports and sales are taking place in areas, which are not really the consuming areas. We all know about imports at Ahmedabad and at Jaipur. States are literally competing with each other, with Haryana reducing taxes and Delhi following suit.

Infrastructure in terms of warehousing and transportation are restricting factors right now, and need to be developed.

A major problem affecting the development of the bullion market in India is the way people look at this business. Anybody who is connected to the bullion business is regarded with a lot of suspicion – what does he do other than gold trading? A lot of government agencies take a very keen interest in the activities of those involved with the bullion trade, and unless this situation is taken care of, ideally by being removed, deregulation or improvement in bullion trading is not really going to take place.

Gold loans have been provided by MMTC, and of course, exporters are also availing of these loans from the other commercial banks. Currently, this is the only method of risk management available, but there are a significant number of small jewellers and exporters who also require loans and the size of the loans they require could be as small as one kilogram, or maybe even less. So, the facilities for small loans, and also the way in which they are priced, is an issue that needs to be looked at. Products are available but they are still not being utilised to the extent that they should be.

Silver loans in India have not taken off. That, again, is a problem caused by the size of the loans - there are a lot of small operators, and the facilities and products they require have so far not been available in India. As I mentioned earlier, implementation of hedging accounts has yet to take place.

The main problem for gold deposits is their acceptance among the public and the willingness of the public to exchange their gold for a piece of paper. Large quantities of gold are found in rural areas, and there is a need to educate the public and make gold deposit schemes more acceptable. The State Bank tried to encourage the scheme but, of course, that scheme never really took off. Tax incentives would be necessary if a gold deposit scheme is to operate in India. Otherwise, large quantities of gold investments made by the public will never be deposited, and will remain underground.

Successive export/import policies have laid down all kinds of rules for exporters – there is a lot of documentation, and a lot of rules to be followed, all proving to be quite tiresome. If Indian exports were to grow, all that red tape would eventually have to be abandoned. Taking the example of value addition norms, there was a time when the Ministry of Commerce reduced these. Matching Customs’ notification of that followed after two years, causing problems for a lot of exporters. Even though it was government policy, announced in parliament, the implementation took a very long time.

Viewpoint of a General Trader Anand Trivedi


Even now, the majority of exporters – excluding those in the special economic zones - are subject to value addition norms for exports and, at times, they have to either lose business or manipulate their documentation, which is not a healthy environment in which to operate.

The controls and supervision over bullion trading is through multiple agencies - the RBI, the FMC, the Ministry of Finance, the Customs, Department of Economic Affairs, the Directorate General of Foreign Trade, the Ministry of Commerce, and of course the state government and the local authorities. With so many agencies involved in trying to regulate the bullion business, it is very difficult to enforce or carry out reforms. If the number of such players were reduced, then there would be a better chance of improving bullion trading.

Every March, the bullion trade worries about customs duty, whether it is going to go up or come down. They try to get rid of stocks and not take any risks on changes. Customs’ duty has to be worked out on a long-term basis. Sales tax issues should be alleviated once VAT is implemented. ■


The Viewpoint of Jewellery Exporters

Nayan Pansare,

Group Financial Controller, Inter Gold (India) Ltd

As an exporter, I will cover five areas that have impacted on jewellery exports out of India – the pre-liberalisation period, post-liberalisation, the export status today of the gem and jewellery industry, industry initiatives and what the expectations are.

My first association with the industry began in 1987 when I took up the assignment of establishing a 100% export-oriented unit in SEEPZ. Work began in 1987, during which time the unit was brought to the stage of trial runs. It was the first time that we manufactured jewellery using the casting method. Prior to that, India had mostly handcrafted its jewellery.

As it was new to us, we decided to carry out our first trial run on the plant before establishing the casting and commercial plants. For this purpose, we sourced 870 gms of gold from the State Bank of India under its replenishment scheme. This proved to be a tough experience, as we had to comply with numerous procedures. Despite fulfilling the obligations required for exporting, we had to lose the differential between the international price and domestic price on account of deficiencies in the ex-im policy.

Nowadays, the replenishment scheme for the special economic zones is not relevant and we never had a request for the replenishment scheme. The establishment of mass-scale jewellery plants was not feasible at that time. The Gold Control Act was still being invoked and it had numerous provisions, which were acting as a barrier to mass-scale production.

There were several problems caused by the Act. For instance, the development of manufacturing jewellery was regulated by gold dealers’ licenses. Labour was regulated by the issuance of the artisan’s card. These artisans’ cards were required before a workman could work in the factory. Aside from having an artisan’s card, the workman had to be a goldsmith, having formally attained a goldsmith’s certificate. Both of these were issued by the gold control authorities.

There had been a general restriction on the holding of primary gold in the category of 2 kg. Primary gold over 2 kg was not permitted. Again, there was a restriction that 995 fineness was the maximum allowed, and for the individual, there was a restriction of 50 gms per person.

As for the procurement of gold, there were very few options available, as India didn’t have a domestic supply of gold except recycled gold and the importing of gold was virtually banned. In the case of export-oriented production, gold supplies were available under export promotion schemes. But, procedurally, these schemes had been very cumbersome and were not considered the best means of procurement.

As a consequence, the industry was disorganised, which led to inefficiencies and under-hand practices. Non-availability of gold supplies led to the industry sourcing its raw materials partly from recycled gold, but mainly from illegal sources. The domestic gold price carried a premium of 40% to 60% above the international gold price, a factor not conducive to mass-scale jewellery production and, consequently, export growth. Exports stagnated for a long time below a level of 100 million. Conditions were not conducive for the absorption of new technology within the industry and the market remained restricted to exports to the US, the UK, and countries in the western gulf.

The beginning of 1990 saw a gradual process of liberalisation in the gold policy. The Gold Control Act was abolished in 1990, and this was followed up by the import of gold by NRIs in 1992. The import of gold under special import licenses followed in 1994. By 1997, gold imports were permitted for nominated agencies and, by this time, India had a fair level of liberalisation in terms of gold procurement.

The Viewpoint of Jewellery Exports Nayan Pansare


Supplies were now easily available both for export production, as well as for domestic market consumption. The process of liberalisation continued further when the government permitted access to international hedging calculated on recognised exchanges. In 1997, the commodity hedge, which was introduced on a generalised basis, was further modified to permit hedging on an OTC basis. In 2002, hedging facilities for exporters were introduced through nominated agencies. The unique and special economic zones such as SEEPZ had further benefited from a dispensation from the special permission earlier required from the Reserve Bank for accessing the international hedging market.

The decade after 1990 changed the entire sentiment regarding gold. Prior to 1990, gold was considered as a taboo and was synonymous with unofficial sources of procurement. In the later years, gold dealing was transformed into a more official market, earning revenue for the government. The decade of 1990 saw a greater initiative on the part of the government in liberalising gold procurement through the continuous refinement in its ex-im policies. The government initiative of setting up pre-paid zones for the manufacture of jewellery began to get good results.

India’s exports in the mid-1980s, which had stagnated, registered continued growth in the 1990s. India also expanded this market base from the conventional markets to new, affluent markets. The decade also saw the establishment of many large manufacturing units akin to mass-scale production, which had in-house capabilities in designing, and product development.

According to data published by the Gem and Jewellery Export Promotion Council on Indian jewellery imports for 2001-2002, Indian imports account for 17.55%. Within the gem and jewellery basket, diamond jewellery has been contributing significantly – around 79.52% of diamonds with the value of about 6.18 million.

India’s position in cutting and polishing diamonds is well known the world over and its share in the global diamond business is estimated at 60%. Compared to diamonds, jewellery exports have been of a relatively lower magnitude. In the year under review, gold jewellery exports accounted for about 2.59% of India’s total exports. The US is the single largest market for Indian jewellery, accounting for about 56%, followed by the UAE and the UK. Exports to European countries, such as Germany, France, and Italy etc. are relatively small.

Mumbai, due to its infrastructure and, in particular, the concentration of the diamond trade, accounts for over 90% of India’s jewellery exports to Germany. Mumbai is also the location of SEEPZ, the special economic zone situated about 6 km from the international airport. SEEPZ has shown a tremendous rate of growth over the last 10 years and jewellery exports from this single zone are over $600 million, accounting for about 44% of the jewellery exports from India.

Figures show that world jewellery exports in 2002 totalled $1.37 billion, recording growth of about 33% over the previous year. The industry had set a target of $3 billion to be achieved by the financial year ending 31st March 2006. If the industry has to achieve this target, it will have to grow at the rate of 30% for the period of next three years.

Growth of jewellery exports would be partly attained with the help of the reforms proposed by Indian government during the 1990s. The reforms in gold policy have been a part of the government’s larger initiative in liberalising industrial policy, trade policy, exchange controls, and foreign investment etc. While the government created a conducive regulatory environment for industrial growth, it was left to private entrepreneurs to exploit deeper opportunities and expand their strategy for growth in jewellery exports.

The industry well responded to this gesture by the government and during the last decade, it has set up many large jewellery units across the country. The existing units have been modernised and have subscribed to new, improved technology in manufacturing. Within this general pattern of modernisation, there have been units, in particular in SEEPZ, which have shown greater initiative in matching international standards in manufacturing and in customer service. Some of them have set up in-house CAD-CAM facilities, which assist them in creating innovative design and product development, geared at the international market. They have also spent time creating infrastructure necessary for larger units to implement modern ERB software.

The Viewpoint of Jewellery Exports Nayan Pansare


With the infrastructure in place, these units are capable of matching product quality standards with that of any large international jewellery manufacturer and have mobilised the capabilities for efficient customer service. The units in SEEPZ, in particular, have planned their growth rates on the integration of diamonds, with the manufacture of studded jewellery for export. Since diamonds have been the backbone of India’s jewellery industry, entrepreneurs believe that future growth of a larger magnitude can be achieved through the extension of incorporating them into the manufacture of studded jewellery. Aside from gold jewellery, they have also begun manufacturing platinum jewellery and combination jewellery, which is supplementing their efforts to grow jewellery exports from India.

As an exporter, we had a few simple expectations from India’s gold policy. We needed a timely supply of gold at international prices with the minimal add-ons of procurement cost, and feel that these are being met. As an exporter, I also look to the cost-effective financial options for procurement such as gold loans. On this front, there is scope for nominated agencies to bring down their spreads and extend the gold loans on a realistic basis.

The recent introduction of interest to the gold deposit scheme by the State Bank of India may make forward trading match market realities, and I feel that this process of refinement would be carried through with a greater zeal.

As an exporter, I also look for a facility for protection against price fluctuation risks. With the recent spate of liberalisation, it has become feasible for us to have a variety of products in the international market. One needs to see the progress of this initiative through the nominated agencies.

While a lot has been done in gold reform policy in India, there could be more progress on this front. ■


Session 2: The Need for Development of the Indian Bullion Market

Questions and Answers

Q – Stewart Murray: A general question – who is going to champion the reform process? If we think back to 1992, the introduction of NRI imports was designed to bring imports out from the control of the smugglers to make them legal, even if in some ways things didn’t really change very much. And in 1997 with the OGL, we have, as Mr Tarapore has said, a much more efficient system than the NRI system, but now if we’re going to push the reform process further, someone in a position of authority has got to be willing to champion it. There must be something in it for them.

Although one can think of the Commerce Ministry as being keen to push the interests of jewellery exporters, I just wonder where in the RBI or in the Finance Ministry you will find politicians and bureaucrats etc. who are willing to do something. It seems to me that the problem in India is that it’s all downside and if they do something they can make a mistake, or, it doesn’t work out and they get blamed – there is no real upside for them. It seems to me that there is no one to champion the reform process. What are the panel’s views on that?

A – Rajan Venkatesh: It’s a very, very valid point. This is something which one segment of the business, the bankers, have realised, and it is one of the reasons for the formation of the Indian Bullion Bankers Association. The primary objective of this association is to liase more with the jewellers, traders, and manufacturers to find out what the real constraints are in their businesses, and put these into perspective, prioritise them and then submit them to the RBI and the relevant authorities. But that’s just one part of the whole process, and it’s a question that I put to my colleagues on the panel.

A – Nayan Pansare: I feel that the RBI should be the right authority to pursue the reforms on gold policy because the RBI, historically, has been dealing with gold and has a much better understanding of it. The only the limitation which we face are that the scams, which have been mentioned, create a problem.

The RBI will be the right authority to convey our message to the various industries, including the Ministry of Commerce and Ministry of Finance.

A – Sunil Kashyap: The IBBA will create a proper platform – much like the LBMA for the London market – for voicing any concerns or any issues. Talking about scams and the downside, in both instances two or three problems that have happened in the last five years were actually well flagged in the market. It’s not like they came as a surprise to the market. The problem was that the market had no way to voice its concerns to the authorities, and I think the IBBA will create that forum. That’s what we are looking for from that association.

Q – Manoj Kapoor, Jindal Group: My question is for Sunil Kashyap. We have discussed domestic loans and have said that they are allowed to be given by public sector undertakings like MMTC, whereas the banks are restricted from giving them. Has this issue been raised with the RBI and, if so, what has been its stand?

My second question is that domestic loans, to whatever small extent, are allowed and are linked to the gold deposit scheme. Most of the banks, as we understand it, are not even offering the gold deposit scheme except a few nationalised banks. There has hardly been any marketing for the gold deposit schemes. Why has that been the case? Also, I am not very clear as to why the absence of assaying facilities hampers the banks, or restricts them from giving two-way quotes.

What stops the banks from accepting standard TT bars or one-kilo bars as good delivery in case they have to give two-way quotes and why is an assaying facility so important to that?

Session 2: Questions and Answers


A – S. Kashyap: Firstly, as far as the domestic loans issue is concerned, the matter has been raised with the RBI. As I mentioned before, the big issue is that there is a perception that the metal is more of a commodity and the RBI is a bit wary about banks lending for even a six months period. Even though the banks can lend dollars, the RBI is wary about allowing that for gold. The issue is under discussion and we hope that there should be some leeway granted, because it is a valid point that the banks are allowed to borrow from overseas, but they are not allowed to lend. So, it is a very strange situation where there is a gap in the regulations.

Regarding the second point, the gold deposit scheme has some very serious flaws from the banks’ point of view. The biggest flaw is that it requires that the deposits have to be in the form of scrap jewellery or scrap bars. In addition, once the scrap has been received it has to be fire assayed and the metal itself has to be refined. This creates a logistical nightmare for the bank because, in the absence of a proper assaying facility and refining facility of international standards locally, it becomes difficult for a bank to offer such products.

Conceptually, if deposits were allowed, a bank would be happy to accept deposits in rupees or rupee-denominated deposits in gold and that, again, requires looking at gold as a financial asset. So, if the RBI allowed banks to accept deposits of gold in the form of rupees – for example, for deposits of 10 grams of gold banks would give the rupee equivalent and that would be considered as a rupee deposit – in that situation, you could create a very robust two-way market for gold deposits and loans. But it’s been the view of the RBI and of the Ministry of Finance right from the beginning that this can only be applicable to physical jewellery scrap. They are very wary about any situation where somebody buys the TT bar from another local bank and deposits it with a bank nearby. It is very clearly imbedded in scheme itself that it is for the mobilisation of deposits held by private consumers.

Thirdly, assaying is very important because ultimately when banks anywhere in the world take metal, which is not virgin metal coming directly from the refiners, typically a bank would take that metal and melt it and transform it into actual good delivery bars. In the absence of that, there is a constraint in terms of supply and demand. In a situation such as that which exists now, where there is more supply than demand, if a bank were to take TT bars, even assuming that the TT bars were properly assayed etc., there is a limit on how much metal the bank can take in without having it converted into good delivery bars and delivering it to London. So, the whole concept of assaying and export of gold has to be tied in for a bank to provide liquidity in a two-way market.

Q – Bhargava Vaidya: My question is for Nayan. You have been a part of many delegations, which have talked about interest rates for exporters and refinancing by the RBI. Have you ever taken up the point that there should a cap on gold loans for exporters and that the RBI can be proactive with its gold reserve stocks by refinancing the banks that are giving gold loans?

A – N. Pansare: We have not dealt with nominated agencies so far as the gold loans are concerned. I have restricted my gold loans to imports only. So far as imports are concerned, we are getting competitive rates, so I have no personal reason to deal directly, but I have found that the gold loans from nominated agencies are charged at very exorbitant rates. Some of them are charging 4.5% to 6% and if dollar loans are available at 2% for exporters, there is no reason why they should charge 5%, but I think they have internal issues.

Q – B. Vaidya: Has there been an attempt by the RBI to refinance gold loans to the exporters, the way it was allowed even when rupee rates were very high and, for example, if I drew a bill, it used to go to the RBI to be refinanced?

A – S. Kashyap: Yes, that is a valid point and, as Mr Tarapore said this morning, the problem is embedded in the RBI rules, which say that they cannot lend to any commercial bank. Even before the deregulation that took place in 1997, the problem was that within the RBI charter itself it is very clear that it cannot give its gold to anybody except for another central bank.



Q – B. Vaidya: Has an attempt been made to acquire customs stocks which are not under RBI control and which are lying unproductively with storage charges, as in the case of gold and silver?

We know that GAPS have been refused to banks, and we know the reason why very well – there are some people in the RBI who feel that savings in gold need not be promoted in India, as it is already very popular. We have talked about the Japanese model, where the banks don’t run GAPS. It’s a sort of a partnership arrangement with a bank that the dealing of gold is done by a trader or a large trading house. Has there been an attempt, especially after the new forum you created, to welcome some sort of a partnership where a GAP can be run, possibly by a trader, but under the supervision of a banking system?

A – S. Kashyap: As far as the IBBA is concerned, it is too early to have discussed an issue like that. If a trader were to offer a GAP, I am not quite sure under whose supervision it would come, because it is not under the RBI, unless it is an NBFC. It is a bit of a nightmare from a regulatory point of view, but I think it is a valid point and is something that could be pursued. The problem is figuring out which box to put it in, whom to go to for permission.

Q – Mr M. Daga: Will the banks finance assaying facilities if the bullion association wants to create them?

A – S. Kashyap: I think that if it were a commercially viable operation, I am sure the banks would be happy to finance it.

Q – Mr Daga: Suppose the bullion association wanted to set up a scientific laboratory, would you finance it as a leading banker?

A – S. Kashyap: I think that the IBBA should look at the ability of the banks to get together, perhaps, to solve the problem of assaying and refining and to come up with a proper model that works. I know it has been talked about but, clearly, given the importance of the issue it is something that we would be happy to look at under the auspices of IBBA.

Q – B. Vaidya: Looking back to the old recommendation of a metal exchange – suppose it starts with silver, and offers both spot and futures contracts – who would be the regulatory authority for spot as well as for forwards?

A – D. S. Kolamkar: As far as the FMC is concerned, it is clearly mentioned in the act that its jurisdiction is to regulate only forward contracts. If some association organises both spot trading and forward trading, we would insist that they should keep a separate risk management system for their forward contract and we will have nothing to do with the spot trading which they conduct.

Q: So, anything up to trade date plus up to ten days would be let go?

A: Yes.

Q – Ishwarlal Jain, Rajmal Lakhichand Jewellers: My first question is to Mr. Trivedi. MMTC and some other financial institutions are allowed to loan gold. You have already started, but you are only making loans for two months, while you are receiving it for six months. Have you any plans to change this and, if not, why not?

My second question is to Mr. Kashyap. I would like to point out that there is a very good assaying and refining facility at Shirpur, but it is not doing well because there is not enough business to match its capacity. Are banks thinking of linking up with them, so that they can do it better because since they are not doing well, others are not coming forward to put up more or smaller units?

A – Anand Trivedi: At present we are not going to extend the period of loans beyond 60 days. The main reason for that is that long-term loans would require much higher margins and also tend to block our supplies in terms of the limits available. So right now we do not intend to increase the period of loans.

Q – R Venkatesh: So, essentially it is an internal issue that constrains you from providing that service?



A – A. Trivedi: Yes, that is right. We are not giving loans for more than two months. There are limits on our supplies and if we gave long-term loans, our limits would get completely blocked.

Q – Harish Pawani, Bin Sabt Jewellery LLC: Mr Kolamkar mentioned that every time there is a scam, it sets the reform process back by 10 years. Despite the number of scams in the securities market, SEBI has gone ahead and started futures and forward trading both on stocks as well as on commodity futures. Can you elaborate on this, given that a precedent has already been set on the securities market?

A – A. Trivedi: Until 1987, only the State Bank was importing gold into India in order to supply exporters. In 1987, there were two agencies; today there are 20, with capital account convertibility being talked about every day. I believe that in the near future anybody will be allowed to import. Of course, the way bullion is viewed by the government, they would like to have some kind of control on imports. There would be some restrictions, but things more than likely will change in the future.

A – S. Kashyap: As to why there isn’t more of a level playing field, it is due to the fact that the government has some amount of discomfort regarding gold trading because of its history. And to some extent they have been validated because you have had a couple of scams in the last five years, but should there be a more level playing field.

The main reason why it has not happened is because this market hasn’t yet set up a self- regulatory body. It is something that, for example, SEBI has and that is why SEBI keeps pushing reforms. We need to work towards having a body, which has certain amount of credibility with the regulators and a body that can actually work with the various agencies in the government to bring about reforms. Then you can create a level playing field, where all the players are then regulated, or self- regulated, through this body. ■

Introduction to Session 2: The Need for …some concurrent steps are taken, efficiency in the...

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