Should gold loans be banned?

Gold

It is well-known that, in financial markets, speculators are a category of market participants who merely have a view on the prices and don't really have exposure in the physical market. Their main contribution to the market is liquidity. Thus, even without holding an ounce of gold, it is entirely possible to speculate on gold prices and non-availability of bank-finance need not necessarily restrain such speculation on gold. Unless the circular is aimed at discouraging hoarding of gold and the banks are equipped to identify such hoarders who depend on banks to finance their hoarding activities. Then this would be a step in the right direction. Else, it might not achieve the intended objectives and might have unintended consequences.

For example, some banks offer gold loans (against gold coins and jewellery) to firms for meeting their working capital requirements (especially in the SME sector) and this circular by any manner of interpretation or implementation should not add to the woes of the SME sector by choking a source of finance. And then of course, there is the familiar problem of circumvention of law using illicit channels for bringing in gold into the country. That would be harking back to the pre-liberalisation days when gold smuggling was rampant and a menace.

A crisis must not be wasted and neither should extreme behaviour. If RBI is able to come up with a 'gold-like' alternative instrument and make a dent in the investment psyche of an average Indian, it would take care of this problem of obsession with gold for all time to come. And that would be no mean feat. After all, what would be simpler to understand than gold?

The author is senior economist, NCDEX. Views are personal

Madan Sabnavis

In the light of the need for financial inclusion, loans against gold are useful for both individuals as well as the SME segment, where the small entrepreneur can obtain loans easily

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