A GOLD PORTFOLIO MANAGEMENT FIRM

INSURANCE AGAINST GOLD PRICE APPRECIATION AND ARRESTING CREDIT RISK IN GOLD
LOANS AND PRICE RISK IN JEWELLERY WHOLESALE/RETAIL BUSINESS

Gold Loans :- The biggest risk in gold loan is price decline. Gold price is not predictable as the affect
can be due to various reasons. Normally a finance company dealing in loans against Gold Jewellery ,
advances for short term say 3 months, 6 months and 1 year. And advance value or Loan to value is
purely based on market rate of the gold jewellery. As per the current regulations applicable to gold
loans a firm can advance upto 75% of market value. So to make gold loan attractive, a firm has to
advance more to the customer. So how it is possible, it is to grant additional loan in the form of
personal loan to the customer with a charge on Gold pledged. As the firm gives more value default
risk is there, so in order to mitigate the risk, a third party normally an underwriter should buy a
put option having 3/6months duration. Process can be illustrated in simple terms as below :-

Market Rate of Gold - 3700

LTV which can be granted as per RBI guideline (75% of Market Rate) - 2775
Give additional amount to the customer by way of personal loan 400
With a charge on Gold pledged
So Total Exposure to customer becomes 3175

Assume the loan is for 3 months, price can either go up or down, if it is up customer will be prompt in
payment of interest and principle

But if it is down, account may qualify to NPA category

So in order to address the price decline, while granting the loan, purchase a put option of gold with
strike price of 3400 or 3600. Which will cost only Rs. 10 to 15 per gram. So it will be just like Insurance
premium. Now at the maturity if price declines your put option will reimburse the loss and if the
price is up then premium will be an expense and customer will service the interest and principle or
the company can repledge the asset.

As NBFC / banks are not the owners of the pledged gold ornaments. The function of purchase of
put option should be carried out by another company which can be a jeweller or any other financial
company. In India Put option in gold has not picked up in volume , but still available . Hence it is
suggested to have the exposure in Dubai COMEX platform. On export GST can be saved to the tune
of 3%, this will be additional revenue for us

And Underwriter (Portfolio Management Firm) will charge a commission for taking the risk , normally
Put Option premium + Rs.15

So using Gold derivative product we have minimized the default risk and ensured a healthy credit
portfolio.
For Jewellery Industry

As the price volatility is high, this product can be used for Jewellers too, to protect from the price
risk against Advance booking, Weight based Gold savings scheme, And price loss due to Credit
Invoice.

Only the need is a Portfolio Management Firm, and working capital will be zero.

Very high scope and good Potential and can be the early birds

By Raghu G, 9847715645