'Banks have not been importing gold due to low demand in domestic market'

Last week, Nepal Rastra Bank had issued a circular amending the Gold Import and Distribution Guideline-2011 that allowed bankers to sell gold directly to traders and jewellery shops if the umbrella associations of the gold and jewellery businesses fail to recommend the names of buyers within 15 days of issuance of sales notice by the banks. Besides that, the amended guideline barred the federations from collecting fees that were being charged for the recommendation. Federation of Nepal Gold and Silver Dealers’ Association, Federation of Nepal Gold Silver Gem and Jewellery Associations, and Federation of Handicraft Associations of Nepal are authorised to recommend the names of their members. Bankers, who are the only authorised importers of the yellow metal in the country, have said that 215 kg of gold is piled up in the vaults of commercial banks and another 50 kg is in the phase of being imported. Will the amended guideline facilitate the sale of gold piled up in banks and where is all the gold coming in from to meet the market demand when banks have not sold them? Pushpa Raj Acharya of The Himalayan Times spoke to Nepal Bankers’ Association President Upendra Poudyal and FNegosida President Mani Ratna Shakya to find the answers and on other related issues.

'Banks have not been importing gold due to low demand in domestic market'

Upendra Poudyal, President, Nepal Bankers’ Association

Central bank’s data shows commercial banks have imported gold worth Rs 1.8 billion in the first five months of this fiscal compared to imports worth Rs 7.7 billion in the corresponding period of the previous fiscal. What was the major reason behind this?

Banks have not been importing gold recently due to the low demand in the domestic market since the last year. Though commercial banks have minimised imports, we still have about 215 kg gold piled up in our vaults and another 50 kg is being shipped to the country. Banks have been discouraged from importing gold due to the low demand because of which there is a large amount of gold parked in our vaults since the last year. On one hand, this has increased our cost of insurance and on the other a large chunk of investment in gold is remaining idle. That is why banks are in no hurry to import gold.

NRB recently issued a circular regarding the import and distribution of gold. Will amended guideline facilitate sale of gold piled up in banks?

It will obviously help in the sale of gold that remains idle with commercial banks. There are three different federations authorised to recommend gold buyers and there are quotas allocated to them. One of the major problems we faced earlier was that two of the federations issued recommendations for its full quota while one issued very few recommendations. Due to this the quota reserved for that respective federation piled up over time. The amended guideline has opened the door for commercial banks to sell gold directly to traders and jewellery shops if the federations do not send recommendations after 15 days of the issuance of sales notice. Fifteen days is sufficient time for the respective federations to issue recommendations to their members.

Gold and jewellery federations have said that it is hard to manage sales when demand is at a peak.

The federations were requesting for import quota of 35 kg per day till fiscal year 2012-13. It means there is demand in the market but the demand is being met to some extent through sales of smuggled gold. The government is losing customs duty and other inland taxes as well. If the concerned authorities are able to control this informal market then demand would go up again. The recent amended circular has been introduced to manage the current scenario. The amended guideline has not made any changes to the allocations and has just made it flexible by setting a 15-day threshold time. After the 15-day deadline is over, if any trader is in need of gold then they can come to the bank and make a purchase. I feel this is a more scientific modality.

Traders have often complained about procedural hassles while purchasing gold from banks. How can banks simplify the process?

First of all, we have to relate this within the context of the government’s limit for import, which is 15 kg per day. The government had taken all these initiatives to stop the misappropriation of gold imported in the country, which is why, we have to fulfil all the procedural obligations so that we know the identity of our clients. Traders should not take it as a hassle to submit documentary evidences.

Gold traders have said that there are different rates among the banks and that the rate set by the banks is higher than that fixed by FNegosida?

It is not true. In general, all commercial banks fix a similar market rate, but it might vary a little due to cost structure (carrying cost, insurance cost) of individual banks. Regarding the market rate, traders can mark-up the price by up to 0.5 per cent on the purchase cost. If the informal market is fully controlled then we will not have this problem. Gold dealers are getting gold through the informal channel at a comparatively lower rate than that fixed by the banks.

Dealers have long been requesting banks to bring gold bars of 100 gram considering the business size of small-scale investors. But this has not happened yet.

We have already held talks regarding this with the federations and we are positive about it. However, it would be costlier. But we can negotiate with the gold traders to import such small-size gold bars on the basis of sharing the overhead cost.

The recent NRB circular has barred federations from collecting fees while issuing recommendations but it has remained silent about charges set by NBA for banks to import gold?

NBA charges concerned banks Rs 10,000 for the import of 50 kg gold to generate the administrative costs. There are 30 commercial banks that import gold on a rotation basis and NBA has made such an arrangement. I think the central bank’s circular has not barred voluntary contribution to the respective federations of gold dealers and jewellery shops.

‘One-third of market demand is fulfilled through recycle of old ornaments’

Mani Ratna Shakya, President, Federation of Nepal Gold and Silver Dealers’ Association

Can you explain the actual demand of gold in the country?

The demand for gold recently picked up and is now at around 20 kg a day due to the wedding season. Normally, it is 10 to 12 kg per day. Gold and jewellery entrepreneurs have been disappointed of late due to the very low demand in the domestic market that we have been witnessing since a year. As the bullion price slumped heavily in the international market from September to November, people stopped investing in gold and are still in a ‘wait and watch’ mode.

Only commercial banks are authorised to import gold and the daily import limit is 15 kg, but you have mentioned that demand is 20 kg per day. Bankers have long been saying that gold is being piled up in their vaults. So, from where is the demand being met?

One-third of the total market demand is being fulfilled through the recycle of old ornaments. Recycling old jewellery for new designs has been the general trend since long but the government has not recognised this fact. Authorities often ask us on how the jewellery shops have been operating despite not purchasing gold from the banks. It is hard to convince them about the demand being fulfilled through recycle of old ornaments. Besides that, it is an open secret that jewellery shops are purchasing gold from the informal market due to the high rate set by the banks compared to the rate fixed by the federation, lengthy documentation process, inferior quality of gold, lack of gold bars of less than one kg, and the most interesting thing is the different rates among banks. In addition, gold being brought from abroad personally is also being sold in the market.

The recent circular issued by NRB has barred the federations from collecting fees while issuing recommendations and opened the door for banks to sell gold directly to traders. The federations have also been alleged of not being transparent in the recommendation process. What is your take on it?

NRB did consult us before issuing the circular and we were told that it is merely a temporary remedy to sell the gold that has piled up in the vaults of banks considering the increasing insurance costs that banks have to incur for gold that remains with them. We have been assured that the provision will be changed as demand peaks because there if often a chance of black-marketing if traders start getting gold rampantly from banks. Traders will start acting as intermediaries. We have made the regulators aware about all these conditions. Secondly, the point you raised about the recommendation process not being transparent is true to some extent. I do not want to name any particular federation but we too had received complaints of certain federations charging up to Rs 10,000 for one kg of gold while issuing recommendations when demand was at a peak. There were also instances of some firms not involved in the gold business purchasing the quota set for the federations and selling gold in the black market. In this regard, the regulatory body should identify the genuine traders and act accordingly and minimise the informal channels of import. Yes, we do receive minimal fees while issuing recommendations and our members voluntarily make a contribution. If you look at Nepal Bankers’ Association (NBA) the situation is similar. NBA too charges member banks for making imports on a rotation basis. These minimal fees are necessary to generate the administrative costs of such associations.

You have spoken about various other issues like the lengthy documentation process and varied rates of gold among banks. Why do you think has the NRB circular remained silent on all these issues?

I mentioned earlier that this circular was introduced as a temporary remedy. We’ve for long been asking banks to bring gold bars of smaller sizes and the monetary policy of this fiscal has also addressed our demand. But banks are not importing gold bars of less than one kg. Likewise, traders are compelled to submit electricity or drinking water bill while purchasing gold from banks which are unnecessary. Also, if you visit the banks you will see that the rates vary with each bank. Though the central bank circular clearly mentions that the mark-up price must not be more than 0.5 per cent of total cost (including cost of insurance) some banks do add additional costs. Banks have also been found to be selling inferior quality gold. While talking about the rates set by banks and by FNegosida, I want to give you an example. If you look at the rates set by banks on January 16, it was Rs 45,700 per 10 gram, but the rate set by FNegosida was Rs 45,695. The guideline has approved 0.5 per cent mark-up for us on bank’s rate but we witnessed that the banks’ rates were higher than the rate fixed by our federation. So, in this situation how will traders be willing to purchase gold from banks?

Source: THT