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Is GML helping small Manufacturer?

CA Surendra Mehta, Secretary, IBJA


Gold Metal Loan (GML) is a mechanism under which a Jewellery Manufacturer borrows gold metal from Banks instead of rupees and settles the GML with the sales proceeds obtained. 

GML is given against SBLC or Bank guarantee for the benefit of the domestic as well as exporters of Jewellery manufacturers.

The GML is normally available at interest rate of 1.5% to 2.5% p.a.  Apart from the interest the borrower is also required to square off the GML any time within its tenure at prevailing market price of Gold.

This GML product has been started by banks as there was very thin margin on domestic and export of gold Jewellery. Gold Jewellery manufacturers generally can't afford interest rate of 12% to 14% on working capital Loan and hence GML is one of the best products available for the Jewellery sector today.

The GML was the most welcome step by gold Jewellery sector presuming that it will help reduce the cost of production and it's basically a natural hedge as borrower needs to repay GML on prevailing market price.

Few bullion Banks recently have been instructed by regulators to not to grant any additional GML beyond the current sanctioned amount and also not to add any new client for GML. Such a step will only help existing GML borrowers and will not at all help prospective small borrowers of GML.

Government initiative to organize gold Jewellery trade can only be achieved if the small Jewellery manufacturers are empowered through GML so that they also come in main stream and stop procuring bullion through illegal means. Also the GML will help small manufacturers reduce their cost of production Vis a Vis working capital loan.

However, banks will have to become more vigil as low cost GML tends to be misutilised by diverting funds to real estate and other means.

 "There is big threat to small retail jewellers as the retail business is slowly shifting to big chain of retail stores. Big retailers who also runs their own manufacturing not only distort market by obtaining Gold Metal Loan (GML) @ 2.5% interest from banks but  also by  generating  gold and rupee deposit from small customers. Such excess liquidity in hands of big retailers enables them competitive buying from manufacturers which has put small manufacturers margin under threat."

It is interesting to see that GML is given for imported gold by the banks. Inspite of fact that dore import in the country is on the rise, even top refiners who matches international quality of gold cannot lend gold to Jewellery manufacturer as they don’t have banking license to do so. Also about 300 tons of gold received to refiners every year as scrap does not get lending advantage like GML. Thus, GML is an advantage to bank and not to Refiners.

GML is an excellent product provided GML is given to domestic players out of gold collected under gold monetization scheme. Even GML for exporter is good product as exporters are always looking at competitive source of funds.


India is also moving towards the Spot exchange regime and it will be interesting to see whether GML will have still role to play in spot exchange regime. In my opinion, in Spot exchange regime, one can’t allow parallel OTC market to develop wherein bankers directly lend gold to Jewellery manufacturers without routing through exchange.


In spot exchange regime, the new method of funding of gold , similar to what is prevalent in equity market, will automatically replace GML as many NBFC will start funding Purchase of Gold through exchange.


It has also been heard that many borrower of GML encash gold in the open market at a discounted price to divert funds to other market which is not in line with purpose of GML.


GML on imported gold leads to more import of gold in the country as each time it is rolled over it get replaced by new imported gold. Thus, only GMS gold should be utilised for GML and that too only for small manufacturer and exporter.


Hence GML is one of the reasons for price disparity between bank and open market as some GML borrower have been diverting GML in open market insead of manufacturing.


Disclaimer: Views are personal and not the views of the publisher.