Letters Of Undertaking Ban Will Hit Smaller Gold Firms, Gems And Jewellery Trade Body Says

Small and medium players in India's gold business will face higher costs as a result of discontinued letters of undertaking and letters of comfort, Colin Shah, vice chairman of the Gem and Jewellery Export Promotion Council, said today.

Smaller players, which account for 20 percent of the country's gold loan book, use these instruments of credit against collateral. A switch to bank guarantees and letters of credit will lead to a 0.5-1 percent increase in costs in what is already a low-margin and highly competitive business, Shah told BloombergQuint in an interview.

Gold players were not a risk to banks as the LoUs and LoCs given to them are against collateral. Diamond jewellers and large gold players, on the other hand, have not been using the banned instruments anyway with the exception of the two players now alleged of fraud, Shah pointed out.

This is part of a series of moves from the Reserve Bank of India after details of the Nirav Modi scam came to light. In the case, Modi's associates approached the domestic branch of Punjab National Bank to issue fraudulent LoUs to foreign branches of other Indian banks through the SWIFT network. These LoUs were not registered in the core banking system for PNB. This means that the bank was virtually unaware of any such transactions taking place.

Also Read: PNB-Nirav Modi Fraud: Understanding The Deceptively Low Risk World Of Buyer's Credit

The impact is not limited just to small and medium gold businesses. Small and medium enterprise players across all industries that use these facilities will be impacted. However, India will get used to bank guarantees and LCs in a few months. In the mean while, Shah does not see an impact on disbursement of credit by banks. “SME businesses will continue to get credit, but they will have to make a greater effort on compliance,” Shah said.