Gold Coin Imports a Concern for Banks

June 29, 2012 – The Reserve Bank of India has put forward some concern that banks importing gold coins for retail sale to individuals and households investing in gold could negatively impact the financial sector through a dilution of its funding.

“Banks’ import of gold coins for retail sale to households has been a matter of concern. It has risen from just one percent of total imports by banks in 2008-2010 to 3.8 percent in 2011-2012,” the Reserve Bank of India stated in its Financial Stability Report.

Quoting World Gold Council data, the Reserve Bank of India said that only 24 percent of all gold imported was used for investment purposes in India. Even the use in jewelry, which is one of the major gold markets in India, was 75 percent aimed at investment. “Diversion of household savings into gold has implications on the availability of funds for the financial sector and, therefore, for growth. The high returns on gold in the recent past could underpin demand, thus putting pressure on the current account deficit on an ongoing basis,” the report form the WGC stated.

In 2011-2012 the Indian subcontinent imported $45 billion worth of gold, an increase of 3 percent year-on-year, despite a fall in physical imports. Gold accounts for 10 percent of total imports to India. Historically, India is the largest market for gold on the planet, overtaking even China with the historical and cultural importance of gold in Indian society.

The banks, MMTC, and state trading corporations, among other entities, are authorized to import gold into the country. “Adverse movements in gold prices can also result in losses on loan portfolios of commercial banks and non-banking financial companies,” the Reserve Bank of India said.

Selling of gold on the part of banks was a financially wise idea as they earned between 100 and 150 Rupees for every gram of gold they sold. The State Bank of India Chairman PratipChaudhur has stated, “Banks took to gold coins because customers needed them. Private sector banks were doing brisk business. So, we thought we were losing out on an opportunity and viable business.”

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