Search the Internet          Tips  Sites: Finance, Investment

RBI asks banks to tighten bullion trade norms

The central Reserve Bank of India (RBI) has asked commercial banks dealing in bullion to tighten their risk management rules after four banks said they faced potential losses from their exposure to a troubled co-operative bank that specialises in gold trade, an RBI official said.

"In a meeting on Tuesday, we have told some banks dealing in bullion to review their internal risk management rules and controls," the official said on Wednesday.

Classic Cooperative Bank, based in the western Indian city of Ahmedabad, is facing a cash crunch after it lent money to a gold trader who has defaulted and is presently not traceable, the official said.

This, in turn, has led to the bank being unable to honour payment orders, or banker's drafts, issued on behalf of the trader.

Classic Cooperative Bank issued payment orders on behalf of the bullion trader to four commercial banks -- state-run State Bank of India (SBI), Bank of India (BOI) and Punjab National Bank, and Standard Chartered Bank.

The payment orders to all four banks have bounced. The RBI is currently investigating why that happened.

The RBI has said the commercial banks' exposure in these deals totalled Rs 696 million.

The RBI allows 12 commercial banks to trade in gold in India. These banks include state-run banks like SBI, BOI and Punjab National Bank and foreign banks like ABN-AMRO and Standard Chartered.

SBI, Bank of India and Punjab National Bank have already stopped accepting cheques from Gujarat's co-operative banks and have cut down on transactions with bullion dealer clients of those banks.

Some co-operative banks in Gujarat have run into liquidity problems due to volatile share markets.

One bank, the Madhavpura Mercantile Cooperative Bank, faced a run on its deposits after panicky depositors began withdrawing money on news it had lent heavily in capital markets and that these loans had turned sticky due to a steep fall in share prices over the past month.

The 30-share Bombay benchmark index has lost more than 15 per cent since the end of February.

Tell us what you think of this report