GMS 2.0: Banks' participation key to success

The scheme's inability to convince big players like temples has to be sorted on a war footing

After three years of launching the Gold Monetisation Scheme (GMS), the central government is planning to rehaul the entire scheme to attract physical gold hoarders. The reason: The scheme has collected less than 20 tonnes. To put the number in perspective, two years back, the World Gold Council had estimated that Indian households held as much as 24,000 tonnes of gold.

Banks have been the main culprit in this fiasco. That is, 14 banks have indeed signed tripartite agreements with seven refineries and 47 hallmarking centres to run the scheme. However, they have not returned signed agreements with the respective centres to start the process. In other words, they have not launched the scheme.

The only bank that seems to have some kind of scheme in place is the State Bank of India. And that too because it has been running a gold deposit scheme for years, and has its systems in place. “We are getting several inquiries from depositors who wish to deposit gold ranging from 30 gram (which is the minimum) to 5 kg in the Gold Monetisation Scheme,” said Kolkata-based Harshad Ajmera, president, Indian Association of Hallmarking Centres (IAHC), adding that if banks show interest, a few hundred kilograms of gold may be deposited in a very short time. Another bullion refiner from Kochi said he had even approached the finance ministry for guidance after getting customers’ queries. But nothing happened.

The GMS, introduced by the government in 2015, has these key features. There are three kinds of deposits — short, medium and long term. Under the short-term (one to three years) scheme, banks are allowed to lend to jewellers, collect it back and return to depositors on maturity. Under the medium- and long-term schemes (five to 15 years), the liability of the deposit is with the government. The mobilised gold is to be auctioned by the MMTC on behalf of the government, and the money collected will be treated as market borrowings. If the price of gold goes up on maturity, the government will pay back the higher amount to the depositor.

The Narendra Modi-led government’s plan to unlock the gold held by temples and individuals was introduced after India’s current account deficit shot up to 4.7 per cent of GDP, or $88 billion, in 2012-13, necessitating the need to reduce gold imports for which India was spending $50 billion-plus on import bills. The government decided to unlock the value of idle gold through GMS. The idea was to mobilise gold and lend it to jewellers. This was expected to reduce the import bill. The World Gold Council, two years back, had estimated that 24,000 tonnes of gold might be with Indian households (worth over 440 per cent of GDP) . This holding figure has only increased now.

Last week, the finance ministry stated in its Interim Budget document that “broad guidelines for amendment of Gold Monetisation Scheme has been prepared and is under consideration.” While the government’s proposals are yet to be made public, the Reserve Bank of India has already started taking some concrete actions. For example, last month it allowed banks to accept gold from government agencies (those confiscating gold for any reason are potential depositors) and trusts.

According to the source, the government is planning to ask banks to open a gold metal deposit account, which will allow banks to return gold in the metal form on maturity instead of the equivalent value in cash. This move could be particularly attractive to temples, which hold around 3,500 to 4,000 tonnes, as they would like to get back gold in metal format instead of cash.

Apart from some big temples, several small temples across the country can potentially deposit 25-50 kg gold in GMS. However, they are managed by trusts that have deeds that do not allow selling of gold. And the GMS, in its present format, gives back cash over the medium or long term – this tantamounts to selling gold, which is prohibited by the trust deeds.

Experts suggest that the government consider more moves. For example, James Jose, secretary, Association of Gold Refineries and Mints said: “The government should open a GMS portal giving details of banks that will accept gold with branches and designated officials. Also, information about locations of hallmarking centres – the first point for customers to melt and weigh gold and issue certificates – should also be provided in this portal. Banks will open gold deposit accounts, based on the certificates issued by hallmarking centres. Such information will help customers who want to deposit gold.”

Another issue that needs attention is the lack of availability of bills. Many potential depositors do not want to go through the hassle of depositing gold, as they don’t have supporting bills. Some might not even know the origin since they may have received family heirloom held to many decades. They would be clearly worried about the income-tax department’s queries. Professor Arvind Sahay, chairperson, India Gold Policy Center, IIM-A recommended the government should give a clarification that up to 1 kg of gold deposited by the gold under GMS will not go through any tax scrutiny. At today’s price 1 kg gold bought 25 years back would be around Rs 33 lakh.

To encourage banks, Sahay suggested incentivising banks to make them feel that GMS is a profitable business proposition. “This can be done by providing monetary incentives, allowing gold collected under GMS to be treated as part of the cash reserve ratio and other moves,” he added.