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The Gold Monetisation Challenges

Monday, June 08, 2015

While the proposed Gold Monetisation Scheme (2015) has been initiated for reducing India’s CAD through utilization of idle gold reserves, it's operational clarity is the key to the success of the scheme, says Care Ratings. Educating the consumers over the presence and benefits of scheme shall be crucial (especially for the rural population), along with offering them attractive interest rates to part away with their gold holdings. The interest rate on the proposed GMS scheme as determined by the banks will ultimately impact the cost of financing for the G&J players. While, it is expected to be majorly beneficial for G&J players using fund-based bank limits for gold procurement, the impact on players using GML are to be seen. Post further clarity as regards to the working of the scheme, Care Ratings expects the scheme to take reasonable amount of time to gain popularity among  consumers for active participation in the scheme

The Ministry of Finance (MoF) on May 19, 2015 had come out with the draft Gold Monetisation Scheme through its e-portal to allow for public suggestion & comments, before the scheme is finalized. The scheme aims at mobilizing domestic holding of gold to provide more self-sustenance to the Indian Gems & Jewellery (G&J) industry. The Indian G&J industry plays an important role in the Indian economy, as it contributes in large-scale employment generation, foreign exchange earnings through export and value addition in terms of both aesthetics as well as investments. Indian G&J industry is dominated by gold which accounts for almost 80% of the total jewellery demand in the country, while investment demands are entirely based on gold.

Globally, India is one of the largest consumers of gold, accounting for around 26% of the total demand for gold in the world in 2014. The total consumer demand for gold in India in 2014 stood at whopping ~843 tonnes as against the world’s total consumer demand of ~3,217 tonnes, making her the largest demand center in the world surpassing China.

Gold also forms India’s one of the largest imports, second only to petroleum. Since the domestic production of gold in negligible, India has to primarily depend on imports for its gold requirements leading to a heavy foreign currency outflow from the country. In FY13, India’s current account deficit (CAD) increased to US$ 87.8 billion, constituting around 4.7% of the GDP, forcing Government of India and Reserve Bank of India (RBI) to introduce a slew of measures in FY14 like 80/20 rule, restriction on lease-based gold procurement, etc. (most of which have been withdrawn subsequently in FY 2015) to curb the domestic consumption of gold.

To avoid similar situation in the near future, the Government of India announced its intention to introduce a Gold Monetisation Scheme in the Annual Budget 2015, to channelize the 20,000 tonnes of domestic holding of gold in the country.

Monetisation of Gold
According to the Ministry of Finance (MoF) in its Annual Budget 2015 there is over 20,000 tonnes (worth over Rs.60 lakh crores) of domestic holding of gold, which is mostly lying as an ‘unproductive asset’ since its neither traded nor monetised. In the budget 2015-16, the Union Finance Minister Mr Arun Jaitley has announced several steps for monetising gold which are as follows:

Monetisation Scheme
This scheme will allow household/institutions to deposit gold and earn interest on the same. Also, it will serve as another channel for jewellers to obtain loan in their metal accounts. The scheme aims at channelizing gold from temples, charitable trusts, individuals and other institutes who have physical holding of gold.

Sovereign Gold Bonds
Sovereign Gold Bonds are to cater to the investment needs of individuals, wherein, anybody can buy these bonds instead of physical gold for investment purposes. The bonds carry a fixed rate of interest. At the time of redemption, the bonds will be redeemed in cash in terms of face value of the gold. The details of the same are awaited.

Indian Gold Coin
To reduce dependence on imports of gold, finance minister has also proposed to commence work on developing an Indian Gold Coin (with an engraved Ashok Chakra) which would help reduce the demand for coins imprinted outside India and also help to recycle the gold available in India.

Draft Gold Monetisation Scheme
The draft gold monetisation scheme released by MoF is aimed at providing impetus to gold and jewellery industry in India by mobilizing gold held by household and institutions in the country thereby reducing the reliance on import of gold to meet the domestic demand and providing the same as raw material to jewellery players on loans from banks.

The primary requirement for the successful implementation of the scheme is a vast infrastructure set-up to facilitate easy and secure handling of gold. Thereby, the scheme is initially proposed to be launched in a few select cities and thereafter, with the improvement in infrastructure for assaying and refining of gold, the scheme can be extended to other cities.

Salient features of the draft scheme...

  • Minimum Deposit Quantity: The minimum quantity of gold that a consumer can bring is proposed to be reduced to 30 grams from the present minimum deposit level of 500 grams, so that even small depositors are encouraged. Gold can be in any form (bullion or jewellery).
  • Gold Savings Account: Consumers will be paid interest on their gold savings post 30/60 days of opening the Gold Savings Account. The proposed amount of interest payable to the consumers has been left for the banks to decide. Both the principal and interest payable to the depositors of gold has to be valued by physical quantity of gold.
  • Redemption: The customer will have the option of redemption either in cash or in gold, which will have to be exercised at the time of making the deposit.
  • Tenure: The tenure of the deposits is proposed to be minimum 1 year and with an option of roll-over in multiples of one year. Like a fixed deposit, breaking of lock-in period will be allowed.
  • Tax Exemption: Like the erstwhile Gold Deposit Scheme (1999), the interests on deposits for consumers are proposed to be exempted from Capital Gains Tax, Wealth Tax and Income Tax.
  • Custodian: The deposited gold post purity check by the certified purity centers has to be transferred to the refineries. The refineries will be responsible for storage of the gold against a fee paid to them by the banks, unless banks prefer to hold it themselves.
  • Tripartite Agreement: The banks will have to enter into a tripartite Memorandum of Understanding (MOU) with refiners and purity testing centers, as regards to the payment of fees, services to be provided and the details of arrangements for the working of the scheme.

Gold collected from consumers will be preliminarily tested for purity and value, which is done after taking consent of the consumers. The same is melted after removal of dust, studs, meena etc and further detailed purity tests will be conducted. Post the tests, the consumer can either take it back after paying a nominal fee or deposit the gold in which case, the fee will be paid by the bank. The refineries are proposed to act as another custodian for the refined gold. The deposited gold can be re-used by the banks to lend to jewellers or sell them in the international market.

Expected benefits

  • Through the scheme the consumers have an opportunity to earn interest income on their idle gold holdings. Further, proposed exemption from capital gains tax, wealth tax and income tax can make the scheme more attractive. The scheme aims at channelizing gold from temples, charitable trusts, individuals and other institutes who have physical holding of gold.
  • It is proposed (still under examination) that banks may be permitted to deposit the mobilized gold as part of their of CRR/SLR requirements with RBI. This is expected to incentivize the banks.
  • The banks can also sell the deposited gold in the foreign market to generate foreign exchange reserve, sell them in the form of coins or commodity for commodity exchanges or lend them to G&J players.
  • The G&J players can now procure gold against a Gold Loan Account opened with the concerned bank, possibly at a lower interest rate, which will be more beneficial for G&J players who are presently procuring gold through fund-based bank limits.
  • For the government, the scheme could provide a breather against Current Account Deficit (CAD) caused by gold imports. Further, the mobilization of 20,000 tonnes of ‘unproductive assets’ would reduce its dependence on imports and also has the potency to provide trade surplus given the good export market Indian G&J sector commands.
  • Given that India is one of the major consumers of gold in the world, increase in domestic supply of gold will most likely reduce the international demand for gold thereby the international gold prices can see likely downward trend. This will also reduce the procurement cost of gold for Indian importers.


  • The Indian consumers attach a high degree of emotional value to their gold holding, especially traditional jewellery; thereby deposits of gold jewellery for re-casting are likely to be low. Additionally, major gold holding in India is in the form of jewellery (contributing almost ~80-85% of the total domestic holding), thereby, for diamond & other stone-studded jewellery, recasting the gold jewellery will significantly decrease the value of the ornament. The consumer also loses on the making charges paid by them for the ornament.
  • The process of purification testing and assaying of gold is a cumbersome process both for the consumer as well as the bank. While rural India possess a good chunk of domestic gold deposit, thereby refineries located at urban & sub-urban centers may create logistic problems for the rural consumers.
  • While banks will play a central role in the working of the scheme; they do not possess any expertise in terms of purity testing or custody of physical gold. Thus they have to depend on other players for the smooth working of the scheme. Thereby, presence of multiple intermediaries along with smaller minimum deposit amount of gold will lead to higher number of transactions and will most likely increase the transaction & handling cost of the banks.
  • The duration of the deposits will also play a role in the decision making of the depositors, wherein smaller duration schemes of minimum one year with option of roll over will provide more flexibility to consumers. While pre-mature redemption feature has been proposed by the MoF in the draft schemes which makes it attractive for the consumers similar to present gold deposit scheme (GDS) the banks.
  • Another important assessment of the scheme is the price risk assumed by the parties involved in the process (individuals, banks & jewellers). While jewellers do normally hedge their price risk of gold, bank also have to secure their gold price fluctuation risk, given the probable duration mismatch between gold monetization scheme for consumers and credit period allowed to the jewellers.
  • The MoF has proposed Know Your Customer (KYC) fulfillment for depositing gold, which can be a deterrent, in case of incremental scrutiny by the Income-Tax Department on deposited gold. Also majority of the consumers may not possess the original bill or voucher of the jewellery which in many cases can be inter-generational & archaic, thus posing additional roadblock in case of documental evidence for gold holdings are sought by the authorities.
  • Further, the interest rate for gold deposit has to be kept attractive for the consumers, which presents dimensional problem in cases where the bank is further lending the gold to the G&J players. Higher interest on gold deposits to consumers will make gold procurement through GMS for G&J players dearer, thereby, its attractiveness in terms of interest and credit period benefit against the present Gold Metal Loan (GML)4
  • The prevailing GML scheme has inbuilt mechanism which covers the gold price fluctuation risk for the G&J players; however the proposed scheme has been silent about it. It puts additional pressure on the banks to hedge their exposures and this will tend to inflate the forward lending rate of gold to jewellers.
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