Gold Monetisation Scheme – A Game-changer

The gold monetization scheme concept introduced in the Budget 2015-16, is expected to increase the supply of gold to the jewellery industry and also for investment. This scheme will unlock the gold lying within the country in a big way according to traders.

Budget 2015-16 has introduced a Gold Monetisation Scheme, which will replace both the present Gold Deposit and Gold Metal Loan Schemes. The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold. The scheme will monetize India’s household gold, reportedly worth $1 trillion. The move would also help in containing trade deficit and current account deficit. Gold imports in January had declined to 38 tonnes from 142 tonnes in April 2014. In 2012-13, the country had imported 845 tonnes.

Monetisation scheme will unlock gold in a big way

Revised gold monetization scheme is expected to increase the supply of gold to the jewellery industry and also for investment. Through this scheme, banks can channelize gold held by households to the industry. At the same time, it will not curb demand for gold through steps like higher import duty and other forms. According to experts, the monetisation scheme will reduce the gold import drastically by 30-35 per cent a year. “Over 20,000 tonnes of gold lying untraded with private parties may become available through banks to jewellery manufacturers in the form of metal loans. This will make the flow of stashed gold in the market and reduce our dependency on imports,” a gold trader said to the Times. Rajasthan will be among one of the biggest beneficiaries due to the sheer size of trade. Meanwhile, under the scheme, depositors of gold will also earn interest on their metal account.

MMTC-PAMP, the only Indian refiner accredited to the London Bullion Metal Association (LMBA), expects the quantity of gold available for purification to increase substantially, in view of the monetisation scheme announced in the union budget 2015-16 and is keen to leverage the opportunity. The refiner expects to purify 50 tonne of gold that may come in the first year through the gold monetisation scheme, said MD, Rajesh Khosla.

Rajesh Khosla

Rajesh Khosla, Managing Director, MMTC-PAMP India

He expects this to go up to 200- 250 tons a year eventually. The programme that FM, Arun Jaitely announced that Saturday is aimed at unlocking 20,000 tonne of the metal lying idle in the Indian households, thereby lowering the dependence of gold imports that have been a major strain on the nation’s CAD. Khosla expects the gold monetisation programme to go long way in reducing the country’s gold imports in reducing the country’s gold imports.

Scheme to help investors deploy gold and earn interest

The plan is to allow depositors of gold to earn interest in their metal account and the jewelers, also to obtain loans in their metal account. Meanwhile, the banks get to monetise this gold with the Reserve Bank of India. The government has its task cut out as it will have to offer a sufficiently lucrative return by way of interest unlike the 2.5-3 per cent offered earlier, whether the target be the household with large holdings or the smaller ones. The budget has introduced the Gold Monetization Scheme that will enable investors to deploy their gold and earn interest, which was not possible earlier,” said Vimal Patel, Chairman and Managing Director of Suwarnsparsh Gems and Jewellery told Economic Times.

Prasad Kapre, CEO, Style Quotient Jewellery Pvt Limited said, “Introduction to gold monetization scheme will help consumers to earn bank interest on jewellery that they currently possess. It becomes productive and gives two forms of returns on investment in the form of bank interest and appreciation of assets over time. This will encourage consumers to buy more jewellery. Further trade will also be able to buy bullion from banks that have such deposits. This will help in reducing the overall dependence on import of gold.” Popley Group Director, Rajiv Popley also said that the monetisation scheme will appreciate gold investments and hence facilitate in encouraging consumers to invest in gold, unlike last year when the gold investments were prohibitive.

Gadgil Legacy to Continue, P N Gadgil Jewellers in Expansion Mode: Saurabh Gadgil

Saurabh Gadgil, Managing Director, P N Gadgil Jewellers

Saurabh Gadgil, Managing Director of Pune-based PN Gadgil Jewellers, said that the scheme to mobilise idle gold and bring it into the system was a win-win situation for all stakeholders. According to him, an interest rate of 3-4 per cent a year would attract depositors.  Older gold deposit schemes in existence offered 1 per cent interest for three/four-year deposits. But sources say that the new scheme will carry a higher interest to encourage people to come forward to monetise their gold. The Government intends to on-lend this gold to jewellers and reduce the country’s import bill. Jewellery you deposit will be melted and assayed. Therefore, at the end of the deposit term, you will get back only gold bars and not your original piece of jewellery.

Jayantilal Challani

Jayantilal Challani, Founder, Challani Jewellery Mart

Jayantilal Challani, President of The Madrass Jewellers & Diamonds Association explains, “The monetization scheme will help traders get gold easily and deal with the inventory crunch faced by the industry. The import duty can’t be enforced on jewellers as gold will be available through the scheme. Consumers will get cheap gold too and traffic of gold will improve too.” Jaya Acharya, President of Karnataka Jewellers Federation (KJF) also had the same views about the monetization scheme. He said, “We have complete faith in the Government and sure they are working towards the betterment of the industry.”

A similar monetization scheme was announced several years back, but didn’t take off primarily because the scheme was targeting people who own large amounts of gold. Since this time these rules have been tweaked to target common man, it is expected to get a better response. What is also giving jewellers reason to believe that it would do well this time is that consumers today are more willing to give up their gold and jewellery than they were earlier. “We found from a recent survey that people are willing to deposit not just bullion but also jewellery. A lot of inherited jewellery could be either too heavy or out of style now so they are willing to deposit it and earn interest on that,” PR Somasundaram, Managing Director India of World Gold Council said to Times. The operational document of the Gold Monetization Scheme should spell out details on how banks could lend this gold out to jewellers, or pledge it to the Reserve Bank of India, experts say.

Commercial banks may hold gold reserves

According to Bullion Desk report, India’s central bank is considering proposals to allow commercial banks to hold a percentage of statutory cash reserves in gold. The proposal has been put forward to incentivise Indian banks to operate the revitalised gold monetisation scheme that was announced in Indian finance minister Arun Jaitley’s budget in February.

P. R. Somasundaram

P. R. Somasundaram, Managing Director, World Gold Council (India)

The RBI has previously considered such proposals but ultimately decided against them, said Somasundaram. The scheme would probably operate in a similar fashion to that of Turkey’s Reserve Option Mechanism (ROM), which allows commercial banks to hold up to 30 percent of their statutory reserves in gold and foreign currencies. Under the new scheme, the government will pay interest for gold deposits made with the country’s commercial banks, which reports suggest will be derived from the amount the government will make from trading it on the market.

Even before the gold monetisation scheme gets rolled out, Federal Bank has already offered its consumers an attractive ‘Apna Gold Loan’ facility. However, Unlike the gold deposit scheme unveiled in the Budget, Federal Bank does not melt the jewellery or gold deposited with it. Customers can deposit gold coins (up to 50 gm) and jewellery with the bank, just like putting it in a bank locker. The advantage in this case is that the bank locker comes practically free of cost. Once the gold jewellery is deposited, Federal Bank will appraise it and give a list of inventory. The bank will sanction an overdraft in the savings account of the customer equivalent to 75 per cent of the value of gold deposited. If a customer uses the overdraft then he has to repay it within one year and pay interest only for the period the money is used. The lending rate on Apna Gold loan is 12-14 per cent a year against 32 per cent charged on credit card cash withdrawals.

Centre to announce gold monetization scheme guidelines by May

The government might issue guidelines for the gold monetization scheme by May, Finance Secretary Rajiv Mehrishi said recently. The scheme will replace the present gold deposit and gold metal loan schemes. “We want to issue the guidelines as soon as possible. If you ask me time-frame realistically, I would say, I will be very happy if the guidelines will be issued by May but how much time it will take I don’t know,” Mehrishi told reporters at a press briefing conducted by him and Chief Economic Advisor Arvind Subramanian.