India Bullion and Jewellers Association pointers to RBI

Prithviraj Kothari, National President of India Bullion and Jwellers Association (IBJA), has written to the RBI, India’s Central bank, stating in plain words that the process designed for OTR is also flawed, as it has installed the Credit Rating Agencies, (CRAs), above the borrower and the bank, by making it mandatory to seek their approval for the Resolution Plan, (RP), whereas they have nothing to lose by rejecting the RP. CRAs are now ruling the roost and, as such, all RPs are subject to their whims and fancies, as they hold a subjective viewpoint and not a practical one, as is held by the banks and borrowers. Furthermore, while SEBI and RBI have both instructed CRAs not to downgrade the external rating of borrowers opting for the OTR, there is no ombudsman for any borrower who has been unfairly downgraded, thus no action against the erring CRAs. A time of 180 days has been prescribed for the OTR starting from the date of invocation of the OTR and no later than June 30th, 2021, which is also too short a period.

The gold industry is a subset of the gems and jewellery sector. While the gems and jewellery industry has been included in the list of industries entitled for the OTR, it seems the gold industry has been excluded from the same, as the ratios prescribed are bizarre and unrealistic.

The gold industry uses the Gold (Metal) Loan, (GML), as the financial product to meet its inventory financing needs, which is available at an annual interest rate of 2.25-4% per annum. The sharp increase of gold prices is the primary problem of the GML borrowers, which should have been addressed by the OTR, but has not. 5. WCL attracts an annual interest rate of 12-14%, which is approximately four times of the GML. By and large, this suggests that any ratio established for WCL may be four times more for GML, based on the interest rate difference between the two and ability to service the debt thereof.

The Total Debt / EBITDA has been prescribed as x5, which is extremely low and should have been x20 or at least x15 for GML borrowers, whereas the same has been recommended for the residential real estate as x9 and commercial real estate as x12, which is the result of the representation made by the real estate sector.

The problem at hand for the GML borrower is the excess in the account, due to the pending margin call based on the increase of the price of gold. The permissible Total Outstanding Liability, (TOL), as prescribed by the OTR, would result in a sharp decrease in the sanctioned bank limits for the borrower.

GML borrowers’ business is dependent on the low interest rate offered by the GML. Currently, all GML accounts have been converted into the higher interest bearing WCL, which is adding to the stress of the borrower.

RBI has restricted imports of gold to Nominated Agencies, (NA), only, for which it issues a license annually. The license issue to banks appointing them as a NA is often conditional, as may be seen through the example of Indian Overseas Bank, (IOB), which has been permitted to extend GML only from deposits accumulated under the Gold Monetisation Scheme, (GMS). RBI has instructed Union Bank of India, (UBI), not to exceed the current exposure of GML level, which has created confusion as the merger of the banks has added to the level of GML borrowers, but UBI does not know how to deal with the GML borrowers from the merged banks.

The OTR should have ensured that all GML borrowers remain within the confines of the GML interest rate, thus providing the support and relief which is essential at this time of crisis.

The NITI Aayog Gold Report recommended that the GML be sanctioned in the weight of gold itself, thereby removing the marked-to-market concept entirely. The industry has been requesting this be implemented towards relief for the GML borrowers due to the COVID-19 pandemic.

FM had, in March 2020, instructed banks to sanction 10% ad hoc WCL for all borrowers to help ease the liquidity crisis. Many borrowers did not receive the same, as banks cited a lack of time to sanction and disburse the same. Unfortunately, there is no ombudsman for the borrowers, thus this issue was never resolved from the borrowers’ perspective.

The E-way Bill requires prior information on the transit of goods. This includes details of the goods being shipped, along with details of the carrier and transport. The implementation of the E-way Bill for the gems and jewellery sector would create a threat to the life of the carrier, thus this sector should be exempt from the E-way Bill.

SEBI and RBI have both issued strict instructions forbidding CRAs to downgrade the external rating of borrowers who have opted for the OTR. Despite this, CRAs have ignored the instructions and have downgraded the external rating of the borrowers who have opted for the OTR. Unfortunately, there is no ombudsman for the borrower.- Prithviraj Kothari National President – India Bullion and Jwellers Association (IBJA)