Gold Monetization Scheme: Govt eyes gold from housewives

The Gold Monetization Scheme (GMS) It is not the first time that the Indian government has announced. The earlier GMS was announced in 1999 to mop up around 100 tonnes of gold but has remained a pipe-dream, despite undergoing marginal changes in the rates. The goal is to encourage Indians, who prefer to hold physical gold, to vest the gold with banks and earn an interest on it. India is the largest consumer of gold, importing about 800-1000 tonnes a year and estimates put the physical goal holdings at 20,000 tonnes valued at about Rs 60 lakh crore.

The union government has made a fresh attempt to revive the Gold Monetization Scheme (GMS) announced during this year’s budget and the new draft was recently made public for expressing views.

The main objectives of this scheme are: (a) To mobilise gold held by households and institutions in the country. (b) To provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks. (c) To be able to reduce reliance on import of gold over time to meet the domestic demand.

The scheme operates on an infrastructure that facilitates easy and secure handling of gold. The draft says that at present there are 350 hallmarking centres that are Bureau of Indian Standards (BIS) certified across various parts of India. These act as a ‘Purity Testing Centres’ for the GMS where a preliminary XRF machine-test will be conducted to give the customer the approximate amount of pure gold. If the customer doesn’t agree with the test results, they could take their jewellery back.

Once the customer’s consent is received, the ‘Fire Assay Test’, where the jewellery is melted to test further purity. The customer has once again an option to take back the gold bars, after paying the nominal fee or deposit the gold and get a deposit certificate.

The bank would open up a ‘Gold Savings Account’, once the certificate is produced and credit the quantity of gold into it. The bank would then commit to pay an interest rate payable after 30/60 days.

Both the principal and the interest to be paid to the depositor will be valued in gold. For instance, on a 100gm deposit, a 1% interest rate would create a maturity of 101gms. However, the depositor has an option to redeem either in cash or gold which should be exercised at the beginning itself.

The testing centres would transfer this gold to the refiners which currently stand at 32 accredited to the National Accreditation Board for Testing and Calibration Laboratories (NABL), unless the banks choose to hold it themselves. To incentivize banks, the draft proposes to permit the deposits against the Cash Reserve Ratio (CRR)/ Statutory Liquidity Ratio (SLR) requirements.

Also, they could sell the gold to generate foreign currency which could be diverted for lending to importers/exporters. In addition, they could convert the gold to coins to sell it to customers, exchanges or jewellers.

The tenure of the deposit will be a minimum of 1 year with a rollover of multiples of 1year and breaking of lock-in period is allowed similar to that of a fixed deposit. Like in the ’99 scheme, the draft proposes that the customers would receive exemptions from the Capital gains tax, Wealth tax and Income tax.

To attract larger participation the Government has proposed to reduce the minimum quantity for monetization to 30 grams from 500 grams. As per the draft, the banks will be free to decide the rate they want to offer on the scheme.

Typically, the gold leasing rate is around 3-5 per cent and assuming that the banks would keep a margin of 1-2 per cent, the likely deposit could be about 1-1.5 per cent. During the year 1999, the scheme was offered an interest rate of 0.75 per cent to 1 per cent and failed to attract the investors. For now, the finance minister accepts feedback over the draft till 2nd of June.

The author is a practicing financial planner and could be reached at k.naresh.k@gmail.com

K Naresh Kumar