Successive Indian governments have been keen to somehow tap into the vast amounts of physical gold held by Indians estimated to be in vicinity of 22,000 tons by the World Gold Council. Governments hate its citizens hoarding gold. Gold imports are a drain on precious foreign exchange. High imports adversely affect trade deficit, and most importantly, investment in physical gold chokes up money supply. The asset simply sleeps in the lockers and vaults. Instead if the money is invested in financial markets, it can be more productive in economic activity.
With an eye on cracking open those vaults of gold, the finance Minister Arun Jaitley during his Budget speech in February this year announced the introduction of a Gold Monetization Scheme (GMS) to replace the 1999 gold deposit scheme and gold metal loan scheme, which were not popular among consumers. He said: “The new scheme (GMS) will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account.”
Draft guidelines of the scheme were introduced in mid of May after due consultations with stakeholders which include banks, refineries, hallmarking centres, jewellers associations, RBI and various other government departments. The government is seeking comments and opinions from the public before implementing the scheme.
The core objective of Gold Monetization Scheme as follows:
i. To mobilize the gold held by individuals and institutions which includes organizations such as temple and trusts in the country. The country’s household gold holdings are estimated at 20,000 tonnes and government aims to bring this into circulation.
ii. To make gold available as raw material on loan from the banks for the jewelers.
iii. Every year 800-1000 tonnes of gold is imported, so GMS is expected to curb dependence on import of gold over time and meet domestic demand.
Key points discussed in draft guidelines of Gold Monetization Scheme as follows:
• Gold deposits can be made in any form i.e. bullion or jewellery by household and institutions,
• The minimum deposit needed is 30 grams,
• The tenure of the deposit will be minimum 1 year,
• Investors can opt for cash or gold on redemption, but the preference has to be stated at the time of deposit,
• The amount of interest rate to be given is proposed to be left to the banks to decide. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example, if a customer deposits 100 grams of gold and gets 1 per cent interest, then on maturity he has a credit of 101 gms.
• In the Gold Deposit Scheme (1999), customers received exemption from capital gains tax, wealth tax and income tax. Similar, tax exemptions are likely to be made available to the customers in the GMS after due examination.
• Banks can sell the gold in these accounts to generate foreign currency which can then be loaned to exporters or importers.
• Banks can even convert mobilized gold into coins for sale to customers.
• It is proposed banks may be permitted to deposit the mobilized gold as part of their CRR / SLR requirements with RBI.
• Even discussed, opening of gold loan account with the bank by jewellers and delivery of gold to jewellers when it gets sanctioned by banks.
• Deciding on interest rate charged by banks to jewellers which should cover interest rate paid to the depositors of gold, fees paid to the refiners and purity verification centres and profit margin of the banks.
- Guidelines state there are 350 hallmarking centres for testing and melting of gold, however more than half of these don’t have a melting facility and are situated at places where permission for this will be difficult.
- Inadequate centres for testing and melting at tier-2 and tier-3 cities where physical gold holding is higher,
- Lack of quality at many of the 32 refineries for storage of gold,
- Logistics issue of bringing gold to a storage point from refinery and transferring it to borrowers of gold loans.
- Most important, incase lower interest rates are offered by banks to customers then people will not be willing to melt their jewellery and coins under this scheme.