Hedging at MCX can assure capital safety

The SGL Retail Jeweller India Forum 2019 hosted a session on “Gold metal loans from banks and how to hedge at MCX”, which discussed issues such as parameters for extension of credit to the industry, the impact of demonetization and GST, the feasibility of gold metal loans, and the ease, or otherwise, of obtaining them, and so forth.
The session was moderated by Sanjeev Agarwal, Chairman, FICCI Gems and Jewellery, Luxury and Lifestyle Forum, with the panellists including Amarpal Singh, MCX; Kiran Shetye, Executive Vice-President, Yes Bank; Ashish Kumar Pethe, Partner, Waman Hari Pethe Jewellers; and Suresh Nair, Deputy General Manager, SBI.
One of the focal points of the discussion was the key financial parameters that banks look out for while giving credit. The panellists talked about the differences in financing gold businesses as compared to diamond businesses from a banker’s perspective. Besides, issues such as GST and demonetisation were also taken up, and the panellists debated about whether or not these legislations had been beneficial to the industry. Concurrently, whether hallmarking is adding value to the industry was also discussed. 
Pointing out that the Indian jewellery market has grown from Rs 80,000 crore in 2007 to Rs 2,60,000 crore in 2017, registering a staggering 230% growth, Agarwal said, “Jewellers have received a  price benefit of 8%, while the trade has received a benefit of 7%. HDFC Bank, in its report on the gems and jewellery sector, has stated that jewellery retail will surpass retail in other sectors in terms of growth. Retail chains are expanding, and this development must be supported by banks via gold metal loans, loans against property, unsecured business loans, invoice financing and private equity and listing.”
Sharing details about how SBI is revamping its credit norms for the betterment of the economy and industry, Nair said, “We are shifting all loan options from cash credit (CC) to gold metal loan (GML) for better monitoring. We are classifying jewellery industry into machine-made and handmade. The former has a billing cycle of two months and the latter, three months. So a retailer working on handmade jewellery with specified scale can avail a gold loan for a cycle of three months at a 25% margin on cash credit.” Talking about how differences in External Commercial Rating (ECR) of a brand create varied security deposits, Nair said, “If the ECR of a brand is of CA ranking, we want a deposit of 25%. Below that, it’ll be 75% with cash collateral or immovable assets as collateral.”
Countering this argument, Shetye said standardisation of credit requirements has not been possible for Yes Bank, which treats the requirements of a retailer, manufacturer, or a job worker differently, as their business scale is different. “Both CC and GML are required, but they should be formulated on a case-to-case basis,” he said.
Pethe talked about how low awareness about seeking GML from banks has limited its usage to just big-time retailers and manufacturers. “A retailer should generally take GML in a debt-equity ratio of 1:2, which amounts to 60% of  working capital. GML should account for 60% of the loan, while the rupee component should account for 30%-40% of the total loan amount. It is important to have a rupee component to the loan because gold prices fluctuate wildly and the rupee loan can work as a safety net,” he said. 
According to Shetye, the debt-equity ratio and the debt-to-net worth ratio should be positive. The EBITDA (earnings before interest, tax, depreciation and amortization) should be 1%-2%. Most importantly, the Profit After Tax (PAT) should be positive. Nair added, “In the case of manufacturers, the TOL/TNW (Total Outside Liabilities/Total Net Worth) ratio should be less than 4:1, while for traders and retailers, it should be less than 5:1.” As per the maximum permissible banking finance that banks follow, SBI now ensures debt repayment within 90 days for the gem and jewellery industry, since concentration of debt is high among just a few stakeholders in this sector. Shetye added that it is the drawing power of the trader concerned that ultimately decides if s/he can avail the amount sanctioned by the respective bank. “One can know his/her drawing power through the monthly stock statements sent by the banks,” he said. 
Justifying the stringent regulations followed by banks of late, Pethe said some banks are vigilant and when they demand collateral of 25% of the loan amount, they are justified in doing so. “The issue with our industry was easy availability of capital, which people took advantage of. Now, we have fair and responsible business practices, and any ambiguity will cost the loanee in the end,” he said.  According to him, in such a situation, retailers should secure themselves by hedging gold, and MCX has been the best platform to assure a zero-loss scheme to the industry. 
Speaking during the session, Singh pointed out that MCX monitors the international price movement, Indian rupee movement, customs duty movement, as well as premium discounts available in the market. 
“MCX has 12 contracts annually, and at the time of their expiry, the MCX price of gold comes close to the spot price of gold. For instance, if a retailer wants to buy a 100-gram gold bar and the MCX price is Rs 80 less than spot price, the retailer can afford to spend Rs 30-40 to move the goods intra-city and still earn a profit of 40%,” explained Singh, adding that MCX has opened centres in Kochi, Bengaluru and Hyderabad, in addition to Tier 1 cities, so as to reach out to jewellers pan-India. In the past five years, MCX has clocked its highest open interest rate in 1 kg gold bars.
Sharing his take on hedging at MCX, Pethe said, “Many manufacturers and retailers, who get bulk orders during festivals, are using futures and options at MCX. I’d advise people to hedge at MCX purely from the point of view of protecting and strengthening your capital, instead of trying to make money therein.” 
During the course of the session, GJC chairman N Ananthapadmanaban asked bank representatives to help in improving the image of jewellers at large. Towards this end, Nair suggested a joint meeting between of the jewellers’ association and the Indian Banks’ Association.