Gold monetisation: Govt scheme to involve jewellers

Details being discussed; interest rate and maturity payment likely in rupees, based on metal price abroad

The gold monetisation scheme proposed in the Union Budget is expected to offer an interest rate or returns in currency marked to gold prices. On maturity, repayment will be in rupees equivalent to the price of gold at the time.

Interest might also be paid in rupees but as a percentage of the gold deposited, sources said. Under existing schemes, physical gold is given back at the time of maturity.

The Union finance ministry is reported to be debating various aspects, including how to pay a higher rate of return, how to set up infrastructure such as assaying centres, and a network of agents to help banks mobilise more gold.

<b>Features</b>

Under current deposit schemes, the gold or jewellery collected is melted only at the government mint, and a purity certificate is issued after 30 days. To make the proposed scheme a success, the government plans to use the existing 200-odd assaying centres, including those in the private sector. This network will be subsequently expanded, to be enable issue of purity certificates to depositors in a day.

Also, under the current scheme, launched 15 years earlier, only a minimum 500g of gold deposit is accepted. This is likely to be reduced to 50g. Banks will also perform a Know Your Customer (KYC) check of depositors, with PAN (tax identity) details. Under the existing scheme, a total of 15 tonnes have been collected so far by four banks — eight tonnes were collected by State Bank of India. Two southern and one Mumbai-based temple are said to be the biggest depositors; there are some wealthy celebrities, too.

The government proposes to involve jewellers and other agencies to act as agents, to convince customers to deposit their idle gold in the form of jewellery, bars or coin. Experts have recommended this agents’ network be as wide as possible.

The rate of interest is expected to be 1.5-2 per cent. So, if a customer deposits 100g of gold, at the end of the year, his/her account will be credited with the rupee equivalent of the price of 1.5-2g, based on the price on that day. For repayment, the premia in the open market in India will not be considered; the London base gold price will be converted into rupees and applicable taxes.

The existing scheme exempts interest income and also offers wealth tax and capital gains tax exemptions, which in all likelihood will be retained. According to sources close to the development, a nomination facility, loans against the deposit and a transferability option are also under consideration.

While banks have asked that the minimum deposit be retained at 500g because collecting small denominations of gold from smaller depositors would increase their administrative and other costs, sources said the government had rejected this. After mobilising gold, banks will have to lend the yellow metal to jewellers.  

There is also a proposal to exempt gold deposits from banks' Cash Reserve Ratio requirement and to allow banks to gradually increase gold as part of the normal CRR, irrespective of gold deposits. The Reserve Bank of India is understood to have said no to the second proposal but gold received under the scheme is most likely to be exempted from CRR. Banks might have to maintain capital adequacy on that.

<b>Turkey</b>

Globally, Turkey’s experience in monetising gold has been considered the most successful. According to the World Gold Council (WGC), Turkey launched the scheme in mid-2012 and has so far collected 40 tonnes from so-called ‘under the pillow’ gold with households.

Compared to that, gold placed with banks by Indians as deposit since 2000 is only about 15 tonnes. According to government estimates, gold with Indian households is about 22,000 tonnes, while India’s annual gold demand is estimated at 900-1,000 tonnes. Compared to that, Turkey’s annual gold consumption is an estimated 180 tonnes, while gold with households is only 3,500 tonnes according to WGC estimates.

<b>Other issues</b>

Additionally, a number of challenges remain that the government will need to address if the scheme is to take off.

For one, the interest rate is a matter of concern. The interest rate on current gold deposit schemes is a not-so-attractive one per cent annually. Errol D’Souza, professor at the Indian Institute of Management, Ahmedabad, has proposed a two to three per cent interest rate in gold grammage terms. Banks say the gold lease rate globally is 1.2 per cent under consignment imports and banks can’t pay a higher rate, as this would lead to arbitrage, buying gold on lease and depositing it with banks. The lending rate for jewellers is four to five per cent, depending on credit profile and collateral.

There are other costs involved —melting of coins or jewellery, assaying, handling charges and administration costs. To make the scheme attractive, higher returns might have to be offered, possible only if it is subsidised, said a banker involved in the matter.

Unaccounted money is a problematic area. Under current norms, banks don’t have to disclose cash deposits up to Rs 10 lakh to income tax authorities. This means information on deposit of gold around 400g (worth Rs 10 lakh) need not be disclosed to any government authority. This provision will also be in the new scheme  but there would be a fear of future law changes.

• 15 tonnes gold mobilised in 15 years 
• 8 tonnes by SBI, 7 tonnes by three other banks 
• Temples are biggest depositors with two southern temples and one Mumbai based temples