The weightier problem in gold saving schemes

While lower tenures are good, the minimum quantity that can be deposited needs to be scaled down considerably

Till recently, it was not easy for a retail investor to invest in a bank gold saving scheme. The entry barriers were quite high. For one, the tenure of lock-in for most banks was three to five years. This reduced the liquidity of the scheme significantly. And more importantly, the minimum amount that could be deposited was 500 gm or gold worth Rs 15 lakh (average price Rs 30,000 per 10 grams).

Last week, the Reserve Bank of India (RBI) removed the first barrier by bringing down the tenure to six months. But the minimum deposit clause remains a strong barrier.

Take, for instance, someone wants to save gold for his/her daughter’s marriage. A product with a higher lock-in would work perfectly well, much like an equity-linked savings scheme (ELSS) for saving taxes or a long-term equity scheme. But, if the latter scheme had mandated that these schemes would accept a minimum of Rs 10 lakh, it would not have encouraged investors. Of course, if the price of gold fell sharply, the lock-in would be counterproductive, much like other market-related instruments.

The deterrent, most experts feel, is the tax issue. Since wealth tax starts at just Rs 30 lakh (one per cent) and gold coins, bars and jewellery are included in it, people do not declare it – much like they do not declare expensive watches. The Direct Taxes Code has increased this wealth tax limit to Rs 1 crore. The code, if implemented soon, should encourage more people to put their gold holdings with banks.

On the other hand, gold exchange-traded funds are likely to become more attractive. With the market regulator Securities and Exchange Board of India, allowing 20 per cent of the gold deposits with fund houses to be deposited in gold schemes, returns from these schemes would improve marginally, as fund houses will not have to incur any cost for storing part of the gold plus banks are likely to pay some amount (at present, they pay around 75 bps annually) to fund houses.

Along with gold ETF investors, the changes in the scheme will also benefit the gold fund of fund unitholders. “For instance, if the fund house generates some returns by parking (lending) gold with banks, then its earnings will increase further pushing up the fund’s net asset value,” says Raghvendra Nath, managing director, Ladderup Wealth Management.

However, banks hold the key here. They have said storage is a major issue. According to the K U Rao Committee, which was set up by the RBI to address issues related to gold imports, 20,000 tonnes of gold is lying idle in India. Some banks like Indian Overseas Bank and Corporation Bank hold barely two tonnes of gold each in their gold deposit schemes.

If banks were to store gold, there would be requirement for additional space, implying more costs for banks. “If banks were to incur additional cost of storage, the rate they will pay to both retail investors and fund houses is likely to come down,” said a bank official.

To reduce gold imports, the government along with the regulators, need to put in place a lot of small things, which will both encourage investors to declare their existing gold holding and make them invest in it as a financial instrument.