India's Reserve Bank considering banning banks from selling gold coins.

The sale of gold coins in India by banks could be curbed with the Reserve Bank of India considering banning such sales. Partly, an attempt by the Reserve Bank to help curb rising gold imports, the Bank says it also believes such sales are not relevant to core banking operations.

The move, if implemented, could deal a major blow to banks that are estimated to make a clear profit of $26 million (Rs 1.5 billion) given the 3% margin from the sales of gold coins. Some 36 banks have been nominated by the apex bank to import gold into the country.

Gold is a regulated sector in India and the government allows state-run and private banks to trade in bullion at the wholesale and retail level. To profit from Indians love of gold, banks in India started vending gold coins four years ago, earning a small commission with each sale.

Though the practise did not catch the fancy of Indian customers in its early days, major discounts and monthly instalment programmes offered by banks during festivals and other auspicious days, including gold-buying days, have resulted in huge sales.

For Indian investors, gold coins in smaller denominations are considered apt for corporate gifting and rewards for contests or for commemorative giveaways. Banks have also been incentivising their staff to sell gold coins as they earn a margin of $2.62 (Rs 150) per gram of gold. Special edition gold coins with images of deities or monuments have also helped to drive the overall coin sales in the country.

Though buying gold coins from the bank is much more expensive than buying coins from the bullion market, since banks keep huge margins, it has been considered a safe investment mainly on account of reliability and convenience factors.

Furthermore, banks also have been leaving no stone unturned in their bid for more consumers, with some banks delivering the gold coins to the residence of the consumer and ensuring satisfaction at delivery.

Prior to 2008, a dollar influx was witnessed in India, which resulted in a sharp appreciation of the rupee. To sterilise dollar inflows, banks were allowed to sell gold, as they imported the yellow metal. The measure was meant to be a temporary one.

With the rupee depreciating 30% since August, and hitting a new low on Wednesay at 57.16 to a dollar, the apex bank is looking to reverse the trend. At a recent meeting, bankers have been advised to go slow on gold coin sales.

HUGE SALES

Customer demands during gold-buying days like Akshaya Tritiya surges due to a belief that gold purchases go a long way toward securing one's future. Gold bars, coins and gold jewellery bought and worn on Akshaya Tritiya signify never diminishing good fortune.

Banks post whopping sales on Akshaya Tritiya, with most banks registering 40% of the retail gold sales during the period. Indian Overseas Bank sold over 500 kilograms of gold during April this year amongst its various branches, and 430 kilograms of gold coins last year in one month alone. The bank has a network of 2018 domestic branches.

Canara Bank sells gold coins through 50 designated branches across eight Indian cities. The bank sold 15 kilo in the build-up to Akshaya Tritiya in March and April at just three branches, and said it had sold more than 500 coins of various denominations in one single day.

On April 21 and 22, the Bangalore circle of State Bank of India sold 6.5 kilograms of gold coins. Last year, the same branch sold 5.5 kilo of gold.

Similarly, HDFC Bank has special offers for its credit card holders on such days. If a customer bought gold coins using the HDFC credit card, the customer would be eligible for a three-month interest-free monthly instalment plan. Also, discounts offered on gold coins vary according to the volume purchased.

Similarly, ICICI Bank offered an 8% discount on gold coins of 99.99% purity. Since reputed banks sell gold coins, for Indian consumers it reduces the chances of fraud.

Banks like SBI, ICICI, HDFC Bank, Bank of India and Indian Overseas Bank account for 70% of gold coin sales in India.

Moreover, the Reserve Bank also has been cracking down on non banking financial companies, (NBFCs) who are predominantly engaged in lending against collateral of gold jewellery and who have recorded significant growth in recent years, both in terms of their balance sheet size and physical presence.

Given the rapid pace of their business growth and the nature of their business model which has inherent concentration risk, the regulator decided to take certain prudential measures. It was also stipulated that NBFCs should not grant any advance against gold coins.

For NBFC, Muthoot Group, gold coin sales have seen a major increase in the last couple of years. In 2009-10, total coin sales of the company touched 276 kilo valued at $7 million (Rs 451 million). A year later, sales jumped to 1,099 kilo valued at $40 million (Rs 2 billion). Last year, sales stood at 814 kilo, given the new directives issued by the regulator.

Source : mineweb.com