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Bullion swindle part of the larger scam

Freny Patel

The Rs 700 million bullion scam in Ahmedabad is not an isolated incident. It is part of the larger pay order scam that rocked the capital market and brought to light the loopholes in the banking system.

The use of pay orders hit banks across the sectors. The State Bank of India (SBI) took the maximum hit with its exposure of Rs 396 million. Bank of India's exposure to the bullion scam was smaller at Rs 50 million. Standard Chartered Bank suffered a loss of Rs 143 million while Punjab National Bank's (PNB) exposure to the bullion scam is pegged at Rs 70 million.

Classic Co-operative Bank, promoted by jewellers, took a hit of Rs 60 million, having issued an overdraft to the defaulting bullion trader, K L Chokshi.

Chokshi had a credit limit with a number of operating bullion banks in Ahmedabad and was able to finance his activities, drawing on personal guarantees.

Even as he purchased gold from the bullion banks at market rates, he sold it at a discount of Rs 400 to 500 per ten-tola bar. According to analysts, this discounting that took place over a year amounted to a Rs 700 million loss in the banking system.

Since the Central Bureau of Investigation enquiries have yet to discover where the funds have been deployed, many bullion traders said that much of these funds have been routed to the stock market, while a portion of it could have been channelled into the diamond trade.

The bullion trade in Ahmedabad allegedly hijacked the co-operative banking system, and brought to light the loopholes which the Reserve Bank of India has failed to identify.

Bullion trade is a cash business involving pay orders moving from co-operative banks to nationalised bullion banks. The system faced a major handicap as bullion-importing banks were reluctant to accept cash deposits on account of various limitations.

The SBI does not accept more than Rs 5 million in cash, while PNB used to accept up to Rs 20 million in cash. Foreign banks such as StanChart are refrained from handling cash payments for want of any currency chests.

Traders were forced to go to co-operative banks to make payments, giving rise to a system of providing credit to jewellers by the bullion banks. Banking sources admit to the excess credit in the bullion trade. Despite a limit set by a consortium of bankers for the traders, many traders get an additional line of "unofficial" credit as cheques get cleared after two days. The failure of setting a proper pricing mechanism by bullion banks added to the scam.

Bhargava Vaidya, a bullion analyst, said, "When gold is given by the bullion banks, the price is not fixed nor is rupee-dollar value. This gold thus given on an unfixed basis is illegal."

This amounts to a gold loan, which as per RBI regulations, can only be given to exporters or, if given to the domestic trade, has to come by way of the gold deposit scheme, added Vaidya.

This gave the players a huge speculative position to trade, as the nationalised banks offer credit facility to only a couple of players -- K L Chokshi and Gitanjali. The difference in the state taxation structure favouring bullion business in Ahmedabad also gave rise to the concentration of the trade in a few centers. Ahmedabad accounts for the maximum sales.

Some bullion banks even allowed big traders to fix the gold price directly with overseas suppliers, even as this would expose them to "unknown risks."

Vaidya said, "There is an urgency to rework the credit system and pricing mechanism in a more transparent way. Banks dealing with bullion should accept cash and not depend on other banks or agencies to do the same."

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