Update: March 30, 2020 1:06 PM STI
New Delhi [India], March 30 (ANI): Banks must sanction a gold metal (GML) loan to the weight of gold and allow it to roll over on paper without importing physical gold, said a leading industry expert.
At the same time, authorities should take action to relieve GML borrowers by banning banks from making margin calls, said Ajay Mehra, managing director of Mehrasons Jewelers.
“This will in effect be tantamount to sanctioning a GML in the weight of gold itself as recommended by NITI Aayog and the Financial Services Department of the Ministry of Finance,” he said.
In November 2015, Prime Minister Narendra Modi launched the Gold Monetization Program (GMS) to reduce imports of the yellow metal by increasing its recycling in the country. But he has a muted response.
Mehra said that a GML is a financial product used by banks to profitably lend the gold accumulated under the GMS. It is also used by jewelers to meet their inventory needs at a low interest rate of 3-4% per annum, while traditional rupee inventory financing is available at 12-14% per annum.
Yet despite the low interest rate, there are no takers for GML.
Mehra said a large public sector bank received 1,300 kg of gold deposits under the GMS, of which it was only able to lend 300 kg. This means that the bank lost money on the GMS transaction because it was paying interest to the depositor and receiving less interest from its borrowers.
Rather than understand why there were no borrowers despite the insanely low interest rate of 3-4 percent per annum, the bank simply refused to accept further gold deposits under the scheme. GMS, because it was a loss making business.
Obviously, Mehra said, this has had an impact on GMS as few banks are willing to take gold deposits. More importantly, it also highlights where the solution lies: the GML.
“Making GML a solid financial product is the key to a successful GMS. For this to happen, it is imperative that the concerns of all stakeholders – banks, borrowers and the Reserve Bank of India, are assessed and addressed. “
Mehra said the coronavirus pandemic (COVID-19) is creating a frenzy in global markets and gold prices have risen exorbitantly. The fluctuations are numerous and each day brings a new shock in terms of market rates.
“This makes GML borrowers desperate for margin calls. “
Governments around the world are taking action to protect and strengthen their respective economies and attempt to protect local businesses from failures.
“Likewise, our policymakers must recognize the serious difficulties faced by GML borrowers and take appropriate action by issuing an order prohibiting banks from making margin calls to GML borrowers,” Mehra said.
“Quick reprieve is the need of the hour and swift redress will prevent the unnecessary creation of non-performing assets (NPAs) from otherwise financially healthy borrowers,” he said. (ANI)