Corporates takes on a glittering edge - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Corporates takes on a glittering edge

Jul 26, 2000

Gold seems to have acquired a retail edge. The commodity, which was till recently banker's apple pie, has all of a sudden grabbed the attention of the corporate sector and mutual funds. One of the first corporate house to tap the yellow metal, Autoriders India Limited has converting its automobile showroom located at Santacruz, Mumbai, into a gold retail outlet through which it will sell 24-carat gold bars. The company has decided to rope in World Gold Council for marketing and selling its bar of yellow metal in the market. It has entered into an alliance with Handy& Harman Refining Group (an international refinery house) for setting up a refinery in Shripur (Dhule), Maharashtra.

The fact that Unit Trust of India (UTI) is considering shelling out gold to policyholders of Grihalakshmi Unit Plan (GUP) at the time of redemption of the scheme clearly indicates that the commodity has already acquired a retail edge.

So what is it that is making banks, mutual funds and corporates to take a deep plunge into gold retailing which was till recently considered as an illiquid non tradable commodity.

The fact that the commodity is a natural hedge against inflation and currency depreciation, gives it a glittering edge.

At present, only three banks have launched their gold deposit scheme---State Bank of India (SBI) and Corporation Bank and Canara Bank. Allahabad Bank and Bank of Baroda (BoB) are in the process of launching the deposit scheme.

Even the gold loan scheme offered by banks to jewellery exporters has many takers. However all the fourteen nominated banks allowed to import and conduct retail gold business in the domestic market are currently asking for a level playing field vis--vis non-financial government enterprises which are active bullion lenders in the domestic market.

The non-financial government enterprises like MMTC, State Trading Corporation (STC), Project Engineering Corporation limited (PEC) and Handloom and Handicraft Development Corporation (HHDC) advance gold to retailers at a cheaper rate as their cost of lending gold to the domestic retailers works out to be 2%-2.5% cheaper than other agencies. The reason: the government agencies do not have to maintain reserve requirements while banks' gold deposits are subjected to statutory liquidity ratio (SLR) and cash reserve ratio (CRR). Bankers are worried that their gold deposit and loan schemes will not take off unless disparities relating to reserve requirements, which banks have to maintain, are done away with. These reserve requirements increase the banks lending cost of metal as against these government enterprises.

The Companies Act and not the Banking Regulation Act governing the government agencies, which retail gold in the domestic market, hence they do not attract any SLR or CRR on gold. Going by the Banking Regulation Act, banks have to maintain 8.50% as CRR and 25% as SLR on their liabilities, which are borrowings like a deposit scheme or a loan scheme and capital adequacy of 8% on their lending. It is quite unlikely that the central bank will relax regulations pertaining to SLR and CRR

requirement in relation to gold deposit and loan scheme. Unless some relaxation pertaining to the guideline comes into force, banks will find it a little tough to sell these products to customers.

Equitymaster requests your view! Post a comment on " Corporates takes on a glittering edge ". Click here!


More Views on News

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms