According to Ramesh Ganeshan, chief of the trade and commodity finance division of ABN Amro Bank NV, if gold loans are allowed it will serve as an important price-hedging tool for jewellers, protecting exporters from price risks during manufacturing process. In a scenario where international gold price has dropped, jewellers, in particular, exporters, need to hedge price risks or else the profit will be lost in just price fluctuation. The gold loan, in this context, will serve as a hedging tool. Ganeshan said that though at present another instrument is available to exporters for hedging such risks on international exchanges abroad through futures and options, domestic futures trading in gold, which earlier existed in the Bombay Bullion Exchange, is yet to be revived and allowed. In those days of options and futures trading at the Bombay exchange, banks were involved in providing storage,finance and safeguarding the asset. For a bank lending to jewellers, the risk on account of uncertainties of cash flow of the jeweller owing to price fluctuation is reduced if a jeweller takes advantage of a hedging product.

He said that in absence of domestic futures trading in the yellow metal, gold loans to exporters are advantageous in more than one way. Such loans will help the industry to meet its working capital requirement while they can divert their own funds for technology upgradation and subsequently emerge as corporate giants. As the interest rate abroad is very low at 2 to 3 per cent, banks can help in extending gold loans for low-cost financing to exporters. This will be provided if it is backed by a similar loan, which the banks will receive from abroad, and are not subjected to CRR and SLR requirements and withholding tax. The RBI, in this context, should see while formulating the guidelines for gold loans how best it can help jewellery exporters. He stated that at present, loans which thebanks take from abroad are subjected to CRR and SLR requirements which increase the cost and therefore raises the interest rate for domestic lending. Moreover, the interest which the banks pay abroad are also subjected to withholding tax.

Unless these anamolies are removed interest rate on gold loan to exporters in India will be much higher than what their counterparts enjoy in other parts of the world.