The earlier article on Buyers Credit on Gold Import, specified rules and process under which buyers credit can be taken against gold import. RBI has recently come out with a circular which resulted in changes in financing of gold; which in turn would also affect buyers credit on gold import. This article gives extract of the circular and its impact on various stake holders:
Extract of RBI Circular Dated 19/11/2012: Bank Finance for Purchase of Gold
In terms of extant guidelines issued vide circular DBOD.No.Leg.BC.74/C.124(P)-78 dated June 1, 1978, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin etc. could lead to fuelling of demand for gold. Accordingly, it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. However, banks can provide finance for genuine working capital requirements of jewellers. The scheme of Gold (Metal) Loan detailed vide our circular DBOD.No.IBS.BC/1519/23.67.001/1998-99 dated December 31, 1998, as amended from time to time, will continue to be in force.
Impact of the above circular on various Stake Holders and Buyers Credit product:
- Getting fund based and non fund based limit will become extremely difficulty irrespective it is 100% backed by Cash Collateral for bullion traders in gold (Fixed Deposits etc). Thus buyers credit on import of gold reduce drastically.
- Importers who were trying to use Bullion Import for arbitrage will move to other precious metals (Diamonds, Diamonds Jewellery etc). As this circular specifically talks about finance on Gold Bullion only.
- Bankers: For many small private sector banks, bullion funding is a big source of business. Banks will not be able to grant advances against gold bullion to dealers/traders in gold if, in the banks assessment is that such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion.
- Trade Credit: Buyers Credit / Suppliers Credit on Bullion Import would come to a halt, which was high volume game for many Indian banks overseas branches.
- RBI: Purpose of above circular is to stop speculation and reduce import of such products. But this circular will have a limiting effect as it covers only Gold, allowing importers to move to other products for speculation.