Banks entry puts pressure on gold traders

When a consumer buys gold ornaments in Mumbai — the hub of gold trade in India — he will have to dole out at least Rs 200 as margin over the official quoted price of Rs 3,800 for 22 carat gold. Dealers admitted that this margin is expected to fall with the entry of banks. This also means the difference between official prices andshop prices will come down, traders said.

There is a complaint that when the quoted price falls on a daily basis, jewellers still sell the ornaments at a fixed price without reflecting daily change in the price level. In spite of paying this extra price, there is no guarantee about the quality as there is no centralised authority to control quality of retail jewellery trade through hallmarking.

While most of the banks — the Reserve Bank has allowed nine banks — are now importing gold on behalf of wholesale traders, they also have plans to enter the retail business. “Public sector banks with large branch networks — even in the remote villages — can play an active role in the retail gold business. It will help even the rural population to get rid of the Marwadi dominated business,” said a senior bank official. This means retailers can directly buy gold from banks avoiding middlemen.

Damani says a tough competition between wholesalers and commercial banks is slowly emerging which will lead to a dropin margins and prices. Even though prices have come down (from nearly Rs 5,000 to the below Rs 4,000 level per 10 gm) in less than a year, it was not reflected at the retail level. “The fall in margins after the entry of banks will benefit the customers. This will encourage customers to go in for gold as an investment option,” Damani said.

Madhusudhan Daga, a well known gold analyst and consultant opines that even at the prevailing prices, gold is a safe investment choice. “It should be in the primary form (biscuits) and not jewellery. The phenomenal growth of gold demand in India of 45 per cent witnessed in 1997 is expected to continue in the coming years,” Daga said. Thanks to a liberal gold import policy, the yellow metal worth nearly Rs 25,000 crore has been brought into the country through the official channels last year, thereby putting an end to the menace of smuggling. “One can bring gold legally and still make good margins. There is no need to smuggle in gold.,” said a jeweller.

NRIs andothers brought nearly 520 tonnes of gold in 1997 following easing of controls on gold imports. Experts say with the entry of the nine commercial banks into organised gold trading, the industry is set for a drastic change. Out of the 736 tonnes of gold demand in 1997, about 85 per cent was used for jewellery and balance for investment and industrial use, said Khursheeda Mody, country manager, World Gold Council. “The rise in inflow of gold through the official channel indicates that smuggling has come to end,” Daga said. The earlier modus operandi was to take out money through the havala route, buy gold in overseas centres like Dubai and send the precious metal to India through various illegal channels.

With the dramatic increase in official imports, the Government would have gained some $ 300 million in import duties on gold last year. Gold consumption was higher in the fourth quarter of 1997, indicating that lower prices have led to rise in demand. There is no doubt that the Rs 30,000 crore gold businessis beginning to experience a total revamp. Rough estimates says around 10,000 tonnes of gold worth nearly $ 200 billion (Rs 8,00,000 crore) — is held by the common folk with the rural population having a major chunk.