The government’s gold monetisation scheme allows individuals to park a minimum of 30 grams of the yellow metal with banks to enable them earn tax-free interest. The scheme is intended to bring into circulation a part of the 20,000 tonnes of gold held by households and temple trusts. It will increase recycling of domestically held gold and reduce jewellers’ reliance on imported gold.
For individuals, the attractiveness will depend on the interest rates offered by banks. For banks, the attractiveness will depend on whether the deposit will count towards the cash reserve ratio and statutory liquidity ratio requirements.
Chirag Mehta, Fund Manager-Commodities, Quantum Mutual Fund, shares his view which is reproduced below.
The gold monetisation scheme, as spelled in the draft guidelines, seems to be a good start. Having said that, more work is required to make it a success.
The scheme does offer some very good incentives but other finer aspects need to be carefully thought out to impress gold holders sufficiently to make a contribution.
This is not the first of its kind. Gold monetisation schemes have been launched in the past but none seemed to be close to the desired objective. The success of the scheme would depend on various factors - most importantly, the interest rates offered.
The hits
The intention to exempt deposits/income from capital gains tax, wealth tax and income tax is a good incentive to lure gold hoarders to part away with some of their holdings.
The minimum quantity set at 30 grams is much better than the 500 grams offered earlier. However, it could have been further lowered to, say, about 10 grams to lure people to try the scheme initially with much lower denominations and gradually increase the minimum quantity over the years as the public gets better acquainted and comfortable with the process.
- Mobilised gold as part of CRR/ SLR
It’s a good way to incentivise banks but are they willing to pass on some benefit of this to the gold depositor? This move will add to the ability of banks to offer higher rates.
- Banks can sell gold for foreign currency
Banks selling gold for foreign currency in a way provides them an opportunity to export gold which, though a prerequisite for the development of the gold market, is not allowed as yet. However, this brings along the challenge of price risk management.
The Misses
- Banks to set interest rates
Banks can currently lease gold from overseas at 1% or at times even lower, as such are the lease rates prevailing in the global gold market. If they can get gold to lease at such low rates there’s little incentive for them to offer higher rates.
Yes, the government has incentivised banks by way of making the mobilised gold as part CRR/ SLR but it would depend on the bank as to how much of the benefit it should pass on to the depositor.
We have witnessed the transmission of interest rate cuts by banks; let’s hope the same is not repeated with gold deposits. Rates in the 5-6% band are likely to entice investors.
- Options for the redemption mode
The depositor will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself. The depositor should have the flexibility to decide on maturity depending on his needs at that point of time.
This brings in the factor of price risk.
- Cumbersome process from a layman’s perspective
The detailed process mentioned in the draft guideline of purity test sounds cumbersome from a layman’s perspective. Also, there various conflict issues that may crop up like melting loss and stone removal charges.
- Need to introduce buyback facility
This should be introduced at any point of time of gold that is given on maturity – to build in the trust factor.
Out of the 32 identified refineries, only some are NABL certified. There has to be a certification/ accreditation of empanelled refineries in line with the LBMA certification. We only have one refinery in India which is LBMA accredited.
- Need to enable cash subscription
The gold metal account should also have the facility to accept cash deposits and equivalent gold to be credited to the depositors account based on the prevailing gold rate.
A gold bank/corporation dedicated towards this task should have been setup to ensure the smooth implementation and functioning of the gold monetisation programme which was missing in the announcements.
Clearly, the government has taken a step in the right direction. Challenges abound and infrastructure bottlenecks slow down the process. However, a more carefully crafted, objective-oriented approach, keeping in mind the practicalities of complexities involved would help in bringing out a much more robust policy.
