Stressed jewellers caught in gold crash

The recent fall in gold prices has put the gems and jewellery industry in tremendous stress, leading to three fourth of banks exposure to the industry going bad.

Banks’ lending to the gems and jewellery is pegged at ₹2.5 lakh crore, though it was cut drastically in last few months.

Addressing a press conference here on Wednesday, Mohit Kamboj, President, Indian Bullion and Jewellers Association, said gold prices have fallen from a high of ₹34,000 per 10 gram to ₹24,700 in last nine months and expectations are that it may dip further to ₹23,500 with China offloading gold from its reserves to withstand the economic crisis.

“As it is, 50 per cent of banks’ exposure to the industry is NPA and another 25 per cent has become stressed asset after the fall in prices. If the government does not take action to ease liquidity crisis in the industry the entire lending may turn NPA,” he added.

The industry has been facing problem in accessing bank loan since 2013 when government restricted gold imports to bridge the widening current account deficit. “Jewellers were getting bank loan at 2-4 per cent two years back. With Government tightening the noose, banks increased it to 18 per cent and levied penal interest of 3 per cent on defaulters. Ever since the industry has not revived,” recalled Kamboj.

Banks, which used to replenish gold to jewellers on executing export order, has completely stopped it, putting the industry in precarious situation, he said.

On the domestic front, Kamboj said the demand has already fallen 10-15 per cent and the festive demand starting with Raksha Bandhan it is expected go down by 40 per cent.

The Association had submitted a memorandum to Prime Minister Narendra Modi and Finance Minister Arun Jaitley and it had been forwarded to Economic Affairs Ministry, he said.

At dean hedging cost of 8 per cent, jewellers were not able to hedge their currency risk, he said.

“In order to curb speculation we have suggested that only public sector banks should be allowed to import gold. Some of the star trading houses importing gold involve in speculation to build the books,” he said.

The association plans to open 100 gold coin show rooms in major cities and has received good response for the tender floated in this regard recently. The first showroom will be launched in September. It is also planning to launch a web portal to facilitate jewellers to tap the online market.

IBJA has received Government permission to launch World Silver Council, an apex body to fix prices and set quality standards. It is also in talks with London-based CME Group to derive a mechanism to arrive at gold price on daily basis.

Meanwhile, banks are also reviewing their position on gold loans. A senior Andhra Bank official said there is no cause for panic as such due to the fall in gold prices. Though it can give up to ₹1,800 per gram of gold pledged as loan (as against the prevailing market price of about ₹2,500), the public sector bank has been conservative, giving only ₹1,600 per gram as loan. Most of the public sector banks too are conservative on gold loans.

However, the private sector banks and gold loans companies are not so conservative. Since the RBI allows them to lend up to 75 per cent of the market value of the gold pledged (loan-to-value ratio), they give the maximum amount permissible to the customer.

Hence, after gold prices tumbled over the last three days, they have called their customers asking them to partly pre-pay the principal amount so that the loan-to-value ratio does not breach the regulatory limit.