Gold price crash may affect banks, says India Ratings
Mumbai: The impact of ongoing steep fall in gold prices on the jewellery industry will be mixed and will depend on gold sourcing norms of individual retailers, but the crash may hit banks, India Ratings said Thursday.
"Jewellers who lease a major portion of the gold will positively benefit from the correction, while banks may be affected negatively," India Ratings Director (Corporate Ratings) Deep N Mukherjee said in a report.
The rating firm believes retailers like Gitanjali Gems, Tribhovandas Bhimji Zaveri, PC Jewellers and Titan, which usually lease gold, will be relatively unaffected by the sharp fall in bullion prices. However, in such cases, the nominated banks (by RBI) will have to bear the commodity risk and thus incur losses, Mukherjee said.
Most jewellers source gold either as outright purchase held as inventory or lease it from nominated agencies like 14 banks identified by RBI. The usual inventory holding period ranges from 100 to 150 days. If the sharp price correction of gold continues, it may to lead to inventory write-offs for jewellers who purchase outright, the report said.
Jewellers who lease most of their gold from the nominated banks would remain relatively unaffected, it added.
Retail jewellers lease gold from banks for a period of 180 days against a collateral placed at an interest rate of 3.5 to 4 percent primarily linked to the international gold leasing interest rates, which are usually lower than the rates on the rupee loans to purchase the gold outright.
The price of leased gold is open-ended and the cost is fixed at the time of sale of gold or jewellery to customers. This enables retail jewellers to lower the inventory risk. It also provides a cushion when prices fall.
The price correction may increase the demand for gold jewellery. However, India Rating expected the discretionary spending to be impacted as those who buy gold as investment will postpone their purchases until the prices stabilise.
Operating margins are also likely to be impacted by the decline in prices as some retail jewellers quote making charges as a percentage of raw material cost, the report added.