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Wednesday’s relaxation in the rule on gold imports and for opening the facilities of gold metal loans will certainly help jewellery companies to cut funding cost, making their business more viable.
Share prices of jewellery companies saw a rebound on Thursday, despite weak market sentiment. However these later fell because of a realisation that the benefit from gold loans would be limited, as dependence on cash-credit facilities remains.
“Smaller jewellers who are not in a position to offer a bank guarantee for getting gold on loan will not benefit from this facility and they will have to buy gold, paying the full price,” said Sudheesh Nambiath, senior analyst at GFMS Thomson Reuters.
The Reserve Bank of India has now allowed gold importing banks to provide it as a metal loan to jewellers. The loan rates could be around four to five per cent. For the past 18-odd months, jewellers were buying gold by paying the full amount. This was blocking their working capital and increasing the funding cost. Now, depending upon their working capital or cash-credit facility limits, part of the requirement would be met by gold metal loans, available by giving bank guarantees. So, all jewellery companies’ share prices opened high in the morning on Thursday at the BSE and National Stock Exchange. Later in the day, the stocks gave up some of the gains but still ended in the green.
A listed jewellery company executive explained, “They will be able to take half their gold requirement on loan as banks will issue bank guarantees only to that extent. For the industry as a whole, most standalone jewellers would be able to manage gold on loan to the extent of 40-60 per cent of their total requirement.” This means some reliance on cash-credit remains.
Jewellers generally have 3-3.5 cycles in a year. Meaning, if they take a gold loan and make jewellery and sell it, it is a three to four-month job. They can use the same gold loan facility thrice in a year. Normally, the loan tenure is six months.
Jewellers do say the worst is over for the sector, with the gradual removal of restrictions and business returning to normal.
Vijay Jain, chief executive officer, Orra Jewellery, said: “Gold loans are back and even the ability of jewellery companies to raise risk capital, either through private equities or the capital market, has been a sustained struggle. It now seems the worst is behind us.” He also said consumer demand was coming back and might stay for five years, as the demand is linked with economic growth.
A gold loan is also seen as a natural hedge — the gold comes on loan but the repayment is after sale of the jewellery; hence, the price risk on the gold need not be hedged. However, gold purchased with full payment needs to be hedged.
