How the Gold Monetisation Scheme will benefit you

The government on Tuesday released a blueprint of the Gold Monetisation Scheme announced in Budget 2015.

Under the scheme:

• A customer can open a gold savings account with a bank, and earn interest on their gold assets (bullion or jewellery).

• The minimum tenure of the gold deposit account will be one year and the minimum deposit of gold under the scheme is pegged at 30 grams.

• Both principal and interest payments to customers will be 'valued' in gold. The interest rate on gold deposits will be decided by banks.

• Depositors will be able to redeem in either gold or cash, but their preference will have to be stated at the time of deposit.

• The scheme will have tax exemptions. Individuals may be exempted from the wealth tax on their gold deposits to encourage households to participate.

• Banks will enter into tripartite MoU agreements with refiners and purity testing centres. Banks will then on-lend the gold to jewellers.

• Although banks will be allowed to sell the gold to generate foreign exchange, the government is still examining if the gold deposits can be counted towards CRR and SLR requirements for banks.

"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," says Somasundaram PR, managing director, India, World Gold Council.

 

Japanese financial services company Nomura says the scheme may turn out to be an attractive option for housholds and temple trusts which currently earn nothing on gold, and now could get a return and storage as well.

Nomura's take on the scheme

1) It is intended to bring into circulation the huge reserves of gold held by households and other institutions (such as temple trusts) in India. This will increase the recycling of domestically held yellow metal and also reduce jewellers' reliance on imported gold.

According to the World Gold Council's estimates, Indian households and other institutions own around 22,000 MT (metric tonne) of gold. Even if the scheme is able to create only 100-200MT in gold deposits every year over the next few years, it could help reduce the gold import bill by 10-20 per cent ($3-6 billion) annually.

2) This may still turn out to be an attractive option for households and temple trusts, which currently earn nothing on gold, and now could get a return and storage as well. Real demand and the scheme's success will depend on the attractiveness of interest rates offered by banks.

3) For banks the attractiveness of offering this scheme will depend on whether the gold deposits will count towards CRR (cash reserve ratio) and SLR (statutory liquidity ratio) requirements. If banks are allowed to include these deposits towards meeting their CRR requirements, it could help release funds for onward lending in the economy. However, banks will need to hedge against the price risk.

"Overall, the Gold Monetisation Scheme is an interesting concept for India that could increase the recycling of domestic gold, monetise some physical savings, and to some extent, also reduce dependence on gold imports," Nomura said.