The importers could get gold from the noddle agencies around 5.50-6 per cent per annum. The tenure of the loan is 180 days, hence an importer who had borrowed the money could rotate it around 24-36 per annum, making arbitrage profit of 20-30 per cent.

At present only handful of the importers are using the scheme, however it is gaining acceptance among the importers who are market savvy, it is learnt.

According to a leading trader, by using gold loans, one could earn 15-30 per cent per annum depending upon the nature of transaction. If the importer keeps gold and forex exposure open, he could earn as high as 30-36 per cent, as he is saving on account of gold lease rate and the cost of forward cover, which comes at 3.40 and 4.5 p.arespectively. If he wants to remain perfectly hedged, still he could earn 15 per cent risk free return, explained a trader.

How it works

The importer who wants to get gold loan has to place a deposit of said amount with the bank. On placing deposit, he or she could open a letter of credit -- LC -- with the bank. Having opened the LC, he goes to the agency which is offering gold loans, shows the LC and borrows the gold from the agency at the rate of 5.50 to 6 per cent per annum. The loan tenure varies from three to six months, depending upon the agency. The loan rate is being derived from the Gold Forward rate offered by London Bullion Market Association (LBMA) and LIBOR. The rate comes around 4-4.50 per cent by subtracting Gold forward, from LIBOR, i e 6.00-2.40. The agency keeps its margin around 100 to 105 basis points, thus effective cost of the loan comes around 5.00-6.00 per cent.

After getting the gold, the importer could sell the gold in the retail market on the very next day, get theinvested capital, which could be rotated for six months at the rate of 24-30 per cent. He also earns around 10 per cent on the deposit, which he had placed with the bank. Each transactions give him the return of 15-18 per cent per annum, provided he keeps gold as well as forex exposure open.

If one is risk averse and wants to hedge it's open positions, one could enter into reverse positions by buy back the borrowed gold and book its dollar import by paying forward premium. He has to pay forward lease rate and cost of forward cover and the total cost comes at 14-16.00 per cent including miscellaneous expenses. The sale proceed could be parked in a parallel finance or fixed deposit with banks.

At present, such schemes are offered by few noddle agencies which might be allowed to borrow the gold from LBMA members. However, it is not clear whether they could lend the said gold or not. The gold loans violate the forward contracts lows or not, is also a matter of investigation by surveillance agencies, accordingto an analyst.

The impact of the scheme is minuscule on the economy, as only handful of importers are using the window. However, if it becomes more popular thanks to cheaper finance and risk free return. As far as the implications are concerned, eventually it would affect sharafi and number of bullion traders. It would lead to integration of LIBOR, Money markets and financing structure of the retail bullion trade.

Convergence of some of these avenues has already started. Eventually, the retailer will stop paying prohibitive borrowing cost of 30-36 per cent. The importers would be no more able to exploit the retailers, predicts an analyst.

Fear of Draught haunting

As the dry spell continues in the state, the bullion trade is likely to face worst ever Dipaval. The fear of draught is already haunting the trade. The farmers of the state normally make their purchase on Dipavali. The agriculture income comprises substantial share in the revenue. The volume in the cash markets is declining. Thebusiness confidence is losing.

Yet an another adverse development, transaction in the unfixed trading in gold has been stopped since last few days, as recovery of old dues is yet to be addressed. The unfixed sale of gold bar, in which prices are determined later on and deals can be settled by paying or receiving the difference, was one of the popular tool of hedging, at least for the small time traders. According to a leading trader the business has lost it's sheen. With the fear of draught looms large over the state, scenario seems all the more grim. Volume in the gold bar is hovering around 1000 bar a day. The situation is unlikely to improve, said a pessimist.