The government hardened a crackdown on gold imports since June this year after imports in the first two months of the fiscal exceeded a record 300 tonnes, worsening fears of a runaway current account deficit. That has had the desired effect on imports, which saw 95% slump in August.
Gold imports accounted for a record 61% of the CAD last fiscal. The plan is to reduce the CAD from $88 billion, or 4.8% of the gross domestic product (GDP), last fiscal to $70 billion, or 3.8% of the GDP, in 2013-14. Compounding the government's worry, the rupee has depreciated by roughly 20% so far this fiscal.
Although jewellery made up for less than 1% of overall gold imports this fiscal, some bullion industry executives said in the absence of a duty differential, imports were gradually picking up. India imported gold jewellery worth $137.57 million in the first four months of this fiscal, compared with total gold imports of $18.52 billion. The country hardly imported any gold jewellery before January 2012 as the duty differential was to the tune of 8%.
As the import duty has been increased, buyers again have to rely more on local jewellery brands and we can expect more income as domestic sales would rise to that extent, said Suvanker Sen, senior executive director at Senco Gold, the largest jeweller in eastern India.
Usually, artisans manufacture gold jewellery factoring in demand and the process of manufacturing takes time. So, in the absence of a duty differential between the imports of plain gold and jewellery, bulk buyers who didn't want to wait for purchases started importing. This affected the livelihood of artisans who were dependent on jewellery making, said Mukesh Kothari, director at RiddiSiddhi Bullions. The domestic jewellery industry directly employs at least 1 lakh artisans.
According to the new RBI guidelines, all gold loan NBFCs must seek the central bank's approval for any expansion plans beyond 1,000 branches and the gold loan companies must put in place proper storage and security facilities.
While stocks of gold loan companies took a beating as the new guidelines came across as a bit harsh, domestic jewellers hailed the finance ministry move to ensure a duty differential of 5% between plain gold and jewellery.
Leading gold loan company Muthoot Finance ended at Rs 103.60 on the Bombay Stock Exchange (BSE), down 8.28% from the previous close. Similarly, Manappuram Finance ended at Rs 15.50 per share on BSE, down 4.26% from the previous close.
While branch expansion plans of major gold loan lenders had been put on hold due to the tough business environment, not all companies seem to be on board with the central bank's announcements. We have about 4,000 branches and that is enough to take care of good business for us. We will not need any new branches, said Thomas John Muthoot, chairman and managing director, Muthoot Fincorp. Currently, Muthoot Finance and Manappuram Finance, the two largest gold players have 4,100 and 3,140 branches respectively.
While banks are allowed to expand without prior permission, in case of NBFCs, the tone seems to be different, a senior official at a leading gold loan company said.
RBI has said that if the gold pledged is above 20g, NBFCs must keep a record of the verification of ownership of the jewellery. Currently, NBFCs are relying on self-declaration by customers for ownership verification. If the RBI insists on any other documents, gold loan NBFCs may lose market share to the unorganised sector, a Religare Institutional Research report said.
In case of auctioning the pledged gold jewellery, the NBFCs will be liable to provide full details of the value fetched and the outstanding dues adjusted and any amount over and above the loan outstanding should be payable to the borrower.
Since there is no standard method to arrive at the price of the gold, RBI has said that gold jewellery accepted as collateral must be valued at the preceding 30-day average of the closing price of 22 carat gold as quoted by the Bombay Bullion Association (BBA).`