Will the New Gold Monetisation Scheme Work?
Moneylife Digital Team 05 November 2015
Flexibility on repayment options, purity of gold as well as number of authentic testing centre and a little-bit higher interest rate is required to make the gold monetization scheme a success
Prime Minster Narendra Modi on Thursday launched three gold-related schemes, which includes gold monetisation scheme to convert jewellery and other yellow metal assets with people into interest-bearing deposits, and the sovereign bond scheme with an eight-year tenure, while allowing an exit option after five years. He also unveiled a coin engraved with the images of national emblem Ashok Chakra and Mahatma Gandhi on its two sides, in a bid to put some 20,000 tonnes of idle gold into productive use. Will this scheme work? According to an asset management company (AMC), success of these schemes lies in how fast the government can improvise them to attract and gain confidence of masses besides spreading awareness. But more about it later.
Launching the schemes, Prime Minister Modi said gold has often been a source of women's empowerment in Indian society, and these schemes will underscore that sense of empowerment. He also spoke about the great bond of trust that the family goldsmith enjoys in India. He said that once the goldsmiths of India gain familiarity with the schemes, they could become the biggest agents of these schemes.
Here are the highlights of the three gold schemes launched by the PM…
Gold Monetisation Scheme (GMS)
- The scheme replaces the existing Gold Deposit Scheme, 1999.
- Outstanding deposits will be allowed to run till maturity or premature withdrawal.
- Resident Indians (individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds) can make deposits.
- Minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold.
- No maximum limit for deposit under the scheme.
- The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS).
- The deposit certificates will be issued by banks in equivalent of 995 fineness of gold.
- The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes (MLTGD).
- There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks for the STBD. The interest rate in the STBD will be determined by the banks.
- The interest rate in the medium term bonds has been fixed at 2.25 percent and for the long term bonds is 2.5 percent for the bonds issued in 2015-16.
- Interest will accrue from the date of conversion of gold deposited in to tradable gold bars or 30 days after the receipt of gold at the CPTC or the designated bank branch.
- Know-your-customer (KYC) norms apply for opening gold deposit accounts.
- The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS.
- The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the central government.
- Designated banks should put in place a suitable risk management mechanism.
- Complaints against designated banks regarding any discrepancy will be handled first by the bank's grievance redress process and then by the Reserve Bank's Banking Ombudsman.
Sovereign Gold Bond Scheme
- Price of gold per gram Rs2,684.
- Applications of issue of bonds will be accepted between 5-20th November. Gold bond issue will be on 26th November through banks, notified post offices.
- The gold bond will be issued by Reserve Bank of India (RBI) on behalf of the government.
- The gold bonds will be denominated in multiples of gram(s) of gold with a basic unit of one gram while the minimum investment limit is two grams.
- The maximum subscription is 500 grams per person per fiscal (April-March) and for joint holders, the limit will be applied on the first holder.
- Only resident Indian entities including individuals, Hindu undivided families, trusts, universities and charitable institutions can buy the bonds.
- The issue and redemption price will be in Indian rupees fixed on the basis of the previous week's (Monday-Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd.
- The bond tenure will be eight years with exit option beginning the fifth year onwards. The bonds will also be tradable in the bourses.
- The rate of interest will be 2.75% per annum payable semi-annually on the initial value of investment.
- Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
- Interest on gold bonds will be taxable as per the provision of Income Tax Act, 1961
- The capital gains tax shall also remain same as in the case of physical gold.
- Commission for distribution shall be paid at the rate of one percent of the subscription amount.
Gold Coin/Bullion Scheme
- First ever national gold coin minted in India.
- The coin will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side.
- Coin weight 5 and 10 grams.
- A 20 gram bullion will also be available.
- The gold coin and bullion will carry advanced anti-counterfeit features and tamper proof packaging and hallmarked by Bureau of Indian Standards.
- The gold coin and bullion will be of 24 carat purity and 999 fineness.
- Initially to be vended through designated and recognised MMTC outlets and later through specified bank branches and post offices.
Talking about the gold monetization scheme, Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum AMC, said, "We are trying to draw a leaf out of Turkey's books where it has been a huge success. However, the important difference between both lies in the approach. In turkey, the depositor of gold walks in to a bank branch with whom he has been dealing for years and his other savings lie there. Therefore, the depositor has the much needed trust and confidence in the institution with whom he is going to deposit his gold with. However, in the Indian context, the customer has to walk in an unknown collection centre to verify and deposit his gold. Its not going to be an easy to task for the holders of gold to part away with their holdings and in the initial phase deal with an unknown entity".
According to the AMC, there are few issues in current format of the gold monetization scheme. This includes under-caratage, flexibility to choose repayment mode and lower interest rate.  
Talking about under caratage, Mr Mehta says, "This problem of under-caratage in India is well known. When the depositor goes with his jewellery, which is marked as 22 carat and comes to know that it's much lower in purity and therefore it will fetch him lower relatively than his perceived value and also relatively to what was paid at the time of purchase. In such cases, there is bound to be a conflict."
Yes Bank said it also feels about the need to do some fine-tuning to improve certain aspects of the gold monetization scheme, like creating more collection and purity testing centres (CPTCs). "Western and Southern states of India have the highest concentration of household gold & gold buying propensity. Hence, while the initial CPTCs are concentrated in these states, in due course of time, the balance six states and union territories (UTs), which currently do not have a certified hall marking centre may also be covered, which will make it convenient for depositors to transact with banks," it said in a release.
Quantum AMC feels that investors should have been given an option to decide repayment option at the end of maturity period. It says, "The option to select mode of repayment at the time of deposit may be done away with as customer would not know that 8-10 years down the line, would they require gold or cash. The depositors should be given the option at maturity to select the mode of repayment."
According to a statement from the Finance Ministry, the scheme will carry an interest of 2.75% payable semi-annually. However, Mr Mehta feels this (interest rate) is too low. "Interest rate offered (in the scheme) could have been higher somewhere close to at least 4% to entice holders of gold to part away with their holdings. The current rate offered of 2.25-2.5% may fall short of expectations," he said.
In order for the scheme to succeed, Quantum AMC feels banks will have to play a pivotal role and it would be better if the customers walk into a banking entity where they have the trust and confidence - an outcome of dealing for all the many years. Also, awareness and educating the masses is important regarding the scheme, it says. 
Talking about the gold monetization scheme, Rana Kapoor, MD & CEO of Yes Bank said, "At a macro level, it will unlock savings in unproductive physical assets and thereby help channelize financial savings towards more productive investments. It will also develop expertise in local hallmarking which would drive demand for Made in India Gold both locally and internationally."
9 years ago
Since money available is put to produtive use which may earn more than 8 to nine percent after meeting hedging cost of the price of the gold the return should much higher the interest should be variable than fixed
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