The Rs 100-crore gold scam of March 2001 and the missing silver in May together have taken their toll on the State Bank of India's (SBI) bullion business. Foreign banks with their aggressive marketing tactics, undercutting of commissions (service charges) and special incentives are cornering a larger chunk of the market.
SBI's monthly sales at its centres have dipped sharply and the bank is left with just about 15 per cent of the market, down from the 35 per cent share it had before March 2001. This was in the wake of SBI having suspended its operations in the key bullion centre of Ahmedabad following enquiries into the bullion scam. "SBI was in the limelight for all the wrong reasons, and many customers thus looked to foreign banks as the next alternative," said a foreign bank executive.
Public sector banks face stiff competition from foreign banks -- ABN Amro, Bank of Nova Scotia, HSBC and Standard Chartered -- in the bullion trade. Against SBI's commission or service charge of 0.25 per cent plus, foreign banks are levying less than 0.2 per cent, said officials.
Foreign banks are also gaining volumes from exporters, as they offer incentives "such as discounts on commissions on large volume commitments", said foreign bank officials.
The key interest of foreign banks is not earning commission on the sale of gold to exporters. "We see greater earnings in the foreign exchange business. Building these relationships offers us added business in the likes of bank guarantees, cash management and so on," they added.
Foreign banks have shown a preference for the export business since this is not as seasonal as the domestic trade (which depends on Hindu festivals and the marriage season). Commission levels are also comparatively higher, said a foreign bank official.
Many of the foreign banks have a key advantage in terms of having their own global bullion supplier within the group. Bank of Nova Scotia takes gold on consignment from Mocarta, while HSBC gets it from the group's recent acquisition -- Republic Bank of New York. Foreign banks are also actively trading abroad and participate in the fixing of gold prices in London (the price is fixed in the morning and in the evening by a consortium of leading banks on a daily basis).
Since SBI severed ties with its global bullion supplier -- Union Bank of Switzerland (UBS) -- following the discovery that 39 tonnes of silver was missing from the vaults of BVC Travel Agency Pvt Ltd. (This is a private vault where precious metals are stored by global bullion suppliers, which send gold/silver on a consignment basis).
Meanwhile, the dispute between SBI and UBS continues with SBI having to take the Rs 40-crore loss on its own books as a result of the pay order scam. In March 2001, one L K Chokshi, a bullion trader in Ahmedabad, swindled the bullion banking system of Rs 100 crore through bogus pay orders.
At the same time, more than 260 kg of gold belonging to UBS received on consignment continues to lie with SBI. Said bank officials: "We do not have a lien on the UBS gold to make good the loss on account of L K Chokshi".
SBI had given gold against pay orders presented by Chokshi, who is now in police custody. SBI is currently taking gold on consignment from various bullion suppliers, including Credit Suisse First Boston (CSFB) and Rothschild.
