India to discuss changes to gold monetisation scheme after muted response

By A. Ananthalakshmi

SINGAPORE (Reuters) - India is set to discuss changes to a scheme to unlock the country's massive stash of gold at a high-level meeting on Tuesday, after a muted response to the programme in the first month of its launch, according to banking sources.

Prime Minister Narendra Modi launched the scheme on Nov. 5 to lure an estimated 20,000 tonnes of gold hoarded in households and temples into the banking system. But only 400 grams trickled in over the first two weeks as low returns and worries over income tax kept Indians away.

Last week, the government announced several steps to make the scheme more attractive for consumers, including measures such as eliminating capital gains and income taxes on the interest earned. The meeting on Tuesday is expected to focus on incentives for banks.

Officials from the finance ministry, the central bank, and banks that will play host to the gold deposit scheme will attend the meeting in Mumbai, said the sources, did not want to identified as they were not authorised to speak to media.

"They would like to see if we (banks) require incentives to make it work," said a banking source, who will be attending the meeting. "Senior (government) officials are getting involved a bit more now to make it work. They are open to feedback."

Support from banks is crucial for the success of the gold monetisation scheme. Similar programmes in the past have failed as they were not profitable for the banks.

Under the current scheme, Indians are encouraged to deposit jewellery, bars or coins with banks so it can be refined to meet fresh demand and cut the need for imports. The consumer would earn an interest and, at the end of the deposit term, get the gold back in the form of bars.

But public response has been lacklustre. Indians' penchant for bullion spans centuries and they would not part with their gold, which is seen as providing financial security, unless they are offered incentives such as higher interest rates.

Banks, however, say they cannot offer attractive rates.

"For a deposit accepted at a higher rate, you should always have a borrower who is willing to pay you an even higher rate," said a second banking source. "If we disturb the equilibrium, somebody has to be willing to pay higher."

Bankers are hoping the government can compensate them for the loss from higher rates - a topic likely to be discussed on Tuesday, the sources said.

"There can be recommendations (from the government) on this. I won't be very surprised," said the first source.

Meanwhile, India's sovereign gold bond programme, which was launched along with the deposit scheme and meant to reduce investment demand for the physical metal, has seen an "overwhelming" response, according to the government.

About 63,000 applications were received as of Friday for a total of 917 kg of gold.

(Reporting by A. Ananthalakshmi, additional reporting by Rajendra Jadhav and Manoj Kumar; Editing by Himani Sarkar)