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RBI tightens banks' bullion trade norms

The Reserve Bank of India has tightened bullion trading norms for commercial banks after some of them faced potential losses from their exposure to a co-operative bank that specialises in gold trade.

"In the context of trading in bullion, they (banks authorised to import bullion) are advised to release gold only against full realisation of value or proceeds of instrument," a directive released on its website www.rbi.org.in during the weekend said.

The instructions come after Classic Cooperative Bank, based in Ahmedabad, issued payment orders on behalf of a bullion trader to four commercial banks -- state run State Bank of India, Bank of India, and Punjab National Bank, and Standard Chartered Bank.

The payment orders to all four banks have bounced and the central bank has pegged the commercial banks' exposure in these deals at Rs 696 million.

The RBI has suspended the board of Classic Cooperative Bank and placed it under an administrator.

SBI, India's largest commercial bank and the biggest gold-import supplier, has said it was facing a potential loss of Rs 395.7 million after it sold bullion to the trader whose cheques drawn on Classic Cooperative Bank bounced.

Bank of India, one of the leading importer-suppliers of gold in Ahmedabad, the largest gold trading centre in India, has already suspended bullion trading.

The bank's decision was prompted by a Rs 50-million loss it suffered after Classic Cooperative Bank failed to honour pay orders issued by it on behalf of a bullion trader.

The central bank has also advised banks to collect 100 per cent margin in cash for the provisional value of gold sold and a suitable margin to take care of likely price fluctuations.

"Banks are further advised that, where gold is sold on unfixed basis, they should follow the uniform practice of settling the trade within five days," the central bank directive said.

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