JOIN USIt’s a comeback of sorts for the Gold Monetisation Scheme (GMS) announced by the Union government recently. The earlier one, which was introduced in 1999, did not turn out to be that successful with depositors as well as banks. So, what is different this time around as far the scheme is concerned that experts seem positive about it?
According to the brokerage firm Nomura, the earlier gold deposit scheme had no real incentives for depositors. Even though the scheme was qualified for tax exemptions from wealth tax, capital gains tax and income tax, interest rates were very low. The ticket size was large with a minimum deposit of 500 grams and the tenure was too long as well (5-7 years) which made it unattractive for households, resulting in very little gold deposit accretion.
In the proposed GMS, the government has lowered the minimum tenure to one year and the minimum deposit to 30 grams. As far as banks are concerned, the earlier scheme had very less incentives for banks. While banks were exempt from maintaining cash reserve ratios (CRR) on the gold deposits (10 per cent in October 1999), they had to maintain the minimum CRR (3 per cent) and also the statutory liquidity ratio (SLR) of 25 per cent.
The 2015 scheme, in contrast, proposes (at the draft stage) that gold deposits be held as part of CRR/SLR requirements. Also, the facilities for melting the jewellery, testing its purity and warehousing it, were issues with the banks as well due to which their response was not that encouraging.
Plus, banks required pre-approval from the RBI for launching the scheme, making it a cumbersome process for them. Although some of these conditions such as prior approval from the RBI were subsequently relaxed in 2013, the scheme failed to gain traction.
Under the 2015 scheme, banks will partner with purity testing centres and refiners to outsource the assaying and storage of gold, reducing the costs for banks. World Gold Council Managing Director Somasundaram P R believes that the new draft norms could be a step in the right direction.
“Both directionally and in terms of content, this draft reflects a practical approach. Once the incentive framework falls into place to the satisfaction of the banks, customers and others, we will own a “Uniquely Indian” scheme that allows gold to become a dynamic, fungible asset in the hands of gold savers with significant benefits to the economy, and therefore provide the gold trade with consistent policies,” Somasundaram opines. So, does the scheme have enough incentives to succeed? From a depositor’s perspective, as gold has to be stored in standardised coins, households are unlikely to deposit their jewellery under these schemes and the target customer (for a bank) would be households or institutions that hold gold as an investment (about one-third of the total gold demand in India), Nomura opines.
The lower ticket size (minimum deposit of 30 grams) and tax exemptions could help attract more depositors and correct some of the faults with the 1999 gold deposit scheme. However, interest rates on gold deposits will need to be much higher than those currently offered (0.75-1 per cent) to make it an attractive proposition.
However, as small gold deposits would entail much larger transaction costs in terms of handling, storage and transportation charges, banks may not offer attractive interest rates, Nomura says.
Unless there is an incentive for all participants involved, the new GMS could also risk seeing low participation. More clarity will emerge once the final guidelines are out, Nomura adds. According to Vaibhav P Chudasama CMT, Research Analyst, Geofin Comtrade, the success of GMS could have an impact on world gold demand.
Gold imports
The gold collected through the scheme will be made available to jewellers for manufacturing of new jewellery and other items. The scheme suggests that individuals will be able to deposit a minimum of 30 grams of gold with banks with lock-in period of minimum one year for interest.
The banks will decide the interest rate. They can lend gold out to jewellers and may be allowed to use it as a part of their reserve or liquidity ratios. According to the World Gold Council’s estimates, Indian households and other institutions own around 22,000 metric tonne of gold.
Even if the scheme is able to collect only 100-200 MT in gold deposits every year over the next few years, it could help reduce the Indian gold import bill by 10 to 20 per cent ($ 3-6 billion) annually. This scheme could lead to attractive source of return for households and temple trusts that are currently not getting anything on gold.
This will not impact immediately on the gold import levels but could impact the world gold demand as India is one of the top consumers in the world, Chudasama opines.
The World Gold Council believes that there are a lot of enablers to ensure success of the GMS this time round. According to it, the other enablers to ensure success of the scheme include linking GMS to Pradhan Mantri Jan Dhan Yojana, extra interest rate for women account holders as well as fulfilment of social welfare schemes through the gold accounts. Besides this, there should be concerted marketing efforts at launch and beyond and the government should look at leveraging the jeweller network.
The jury still seems to be divided on whether the scheme can succeed or not. But one thing is for sure. In case it succeeds, it will go on to benefit the Indian economy and help reduce gold imports.