With the sharp rise in bullion prices, the Reserve Bank of India plans to ease bank loan extended to jewellers by way of gold metal loans (GML).
The banking regulator plans to extend GMLs to gold jewellery exporters, domestic jewellery manufacturers and others for outsourcing jewellery manufacturing.
The RBI also plans to extend the tenor of gold metal loan to 270 days from 180 days and has given banks the freedom to fix the tenure, said the regulator in a consultation paper released on Monday night.
GML is a mechanism under which a jewellery manufacturer borrows gold metal instead of rupees and settles the GML with the sale proceeds of gold jewellery.
“Current guidelines allow extension of GML to jewellery exporters and domestic jewellery manufacturers. It is proposed to allow GML to domestic non-manufacturers as well for outsourcing their manufacturing of jewellery,” said the RBI.
The GML scheme was introduced in 1998 to facilitate working capital finance to jewellery exporters in the form of raw gold imported by banks.
The scheme was liberalised over the years, allowing banks to extend GML to domestic jewellery manufacturers, and also from the gold deposits mobilised under the Gold Monetisation Scheme.
With a view to further liberalise the scheme, harmonise the extant regulations applicable across eligible borrower segments in jewellery industry and provide more operational freedom to banks to devise their GML policy, said RBI.
big relief
The move comes as a big relief for the gems and jewellery ecosystem hit hard by the 50 per cent tariff levied by the US, the prime market for Indian exporters. The jewellery demand in the domestic market has also slowed down due to sharp rise in the yellow metal prices.
Prithviraj Kothari, Managing Director, RiddiSiddhi Bullions, and President of India Bullion and Jewellers Association, said the RBI move to allow GML for the entire industry, along with a proposed increase in tenor to 270 days, will widen access and increase credit cycles, reduce working capital strain in an industry.
Traditional bank lending remains cautious due to increase in inventory costs on back of higher gold prices, he said.
The introduction of longer tenor GMLs will better coincide with jewellery manufacturing and export cycles, decrease financing costs and include more players in the formal financing ecosystem, he added.
In Dubai and Turkey, jewellers are offered flexible gold financing with longer payback cycles, with less operational disruption and greater export competitiveness, said Kothari.
Despite being the second-largest consumer of gold, structuralised financing has not developed in India. If the RBI’s proposal narrows this gap, it may not only augment liquidity in the domestic market but will also improve competitiveness of jewellery exporters, he said.