National Institution for Transforming India (Niti) is proposing a new policy that would relax the stringent collateral conditions for loans and letters of credit (L/Cs) to jewellers to buy gold.

But opposition to the Indian government think tank's draft gold policy is growing after the US$2 billion Nirav Modi scam, which involved the fraudulent use of foreign L/Cs and letters of understanding.

Opposition calls

Niti's policy plans to relax the stringent collateral conditions for loans to jewellers to buy gold, but the finance ministry and bankers oppose the proposal and consider it a recipe for disaster.

The proposed policy advocates the removal of the requirement of forward cover for a Gold Metal Loan (GML). It allows a jeweller to borrow gold instead of money and settle the loans from the sale proceeds.

Opponents of the policy point out that the Reserve Bank of India (RBI) has been tightening the rules following several cases of fraud in gold loans.

L/C due diligence

The RBI has advised that L/Cs and guarantees given to borrowers in gold transactions must be accompanied by a "rigorous credit appraisal exercise".

Each bank should carry out its own diligence exercise and not depend on the fact that another bank has provided an L/C.

"Lack of proper monitoring mechanisms and not ensuring end use of GML has resulted in certain instances of frauds and misuse related to GML by certain unscrupulous jewellers," the RBI said in a statement.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.