Banks' aversion to higher interest may hurt Modi govt's plan to draw out gold stocks

Banks unwilling to raise interest rates on gold deposits beyond 1%

Indian lenders do not want to raise interest on gold deposits much beyond 1%, bankers said, which could derail a government plan to cut massive imports by mobilising tonnes of gold now stored in households and temples.

Prime Minister Narendra Modi's government is expected to launch a scheme this year to lure into circulation some of the 20,000 tonne of idle gold, melting it down and lending it to jewellers, to feed Indians' ravenous appetite for the metal.

Huge gold imports were blamed for pushing the current account deficit to a record $190 billion in 2013, prompting the government to hike its duty on imports to 10%, an all-time high.

In 1999, a similar gold monetisation plan proved ineffective, partly because of low interest rates, and bankers fear a repeat unless the government funds lenders to implement the programme.

"We can't give more than 0.75% interest," said Neerja Nigam, deputy general manager of precious metals at State Bank of India, the country's biggest lender by assets.

"We have asked the government to give us some incentives," she said on Saturday on the sidelines of the International Gold Convention in Panaji, capital of the western state of Goa.

In May, New Delhi proposed that banks treat gold deposits as part of their cash reserve ratio (CRR), the share of deposits they are compelled to keep with the central bank, or the statutory liquidity ratio (SLR), the minimum amount of bonds they must hold.

But the government dropped the conditions after the Reserve Bank of India expressed fears that banks might hoard gold.

Nigam said her bank could pay interest of 2% if deposits counted towards the CRR. Two other private bankers agreed, but declined to be named as they did not want to be seen speaking against the government.

The government wants families to abandon tradition and hand over their gold.

"At 1%, I don't think the scheme will succeed," said a leading jeweller from Kerala, a southern state. "Very few households will come forward."

One government source said the scheme could roll out in September.

"At the start the government should give banks interest subvention to make things viable," said Shekhar Bhandari, executive vice-president of Kotak Mahindra Bank.