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Gold Monetisation Scheme

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Monetization refers to a process of converting a commodity into domestic currency– rupee. Gold Monetization refers to unlocking the value of gold in terms of rupee.

Gold Monetization Scheme (GMS) refers to a process wherein a depositor deposits gold (say jewellery, coin, etc.) with a bank which is then lent by the bank to its borrowers (say jewellery makers), after melting into gold bars. This is akin to a normal banking operation (like a savings bank account), but carried out in terms of gold instead of in rupee. 

GMS allows the depositors of gold to earn tax free market determined interest income (denominated in gold but recoverable either in gold or in rupee [mandatorily in rupee if it is deposited for a medium or long term]) from the pure gold they deposit with banks in their “Gold Savings Accounts” and permits the jewelers to obtain their raw material -gold bars created from the melting of the gold deposited with the banks- as loans in their “Metal account”.  In addition, Banks / other dealers would also be able to monetize their gold. 

Gold can be submitted in any form (bullion, jewellery etc) but the amount deposited with the bank is calculated on the basis of the pure gold content of that deposit (after removing the weights of precious stones in jewellery etc.), which is verified through an accredited assayer. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (at the time of making the deposit).

Union Cabinet approved the Gold Monetization Scheme in September 2015 and Reserve Bank of India (RBI) issued the detailed guidelines -Reserve Bank of India (Gold Monetization Scheme) Direction, 2015- for the implementation of the Scheme on 22 October 2015. Certain modifications were made to the Scheme Guidelines on 21 January 2016.

Only Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme, either individually or jointly. While the minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness, there is no maximum limit for deposit under the scheme.All Scheduled Commercial Banks (excluding RRBs) can accept these deposits.

Gold Monetisation Scheme was launched on 5th November, 2015 and till December 10, 2016 a total of 5781 Kilograms of Gold has been mobilized under the Gold Monetisation Scheme including those raised from a few temples. It is not mandatory for temples to deposit in the scheme.

 

Objectives
The Gold Monetization Scheme (GMS) was announced in the Union Budget Speech of 2015-16 with the following objectives[1]:

 

Background
The basic idea behind the scheme is to mobilize the gold lying idle and put it to productive use. India is one of the largest consumers of gold in the world; however, it has to rely on imports to meet around 80 per cent of its demand for gold. Gold accounts for a preponderant share in the country’s trade balance. Gold imports contributed to nearly 30 per cent of trade deficit during 2009-10 to 2011-12. In this context, an idea that has gained currency is to monetize the gold which is lying idle with the households and other entities within India and make it available for re-use.

The Government announced the introduction of a Gold Monetisation Scheme in the Union Budget 2015-16. In pursuance to this, the Government prepared the draft guidelines for the Scheme which were placed on www.MyGov.in portal on 19th May, 2015 for public comments/suggestions. On 9th September, 2015, the Cabinet gave its approval for the introduction of the Gold Monetization Schemes (GMS). The detailed operational guidelines were issued by RBI on 22 October 2015.

Though GMS was announced in the Budget to replace the hitherto existing Gold Deposit Scheme (GDS) (1999) and Gold Metal Loan  (GML) Scheme (1998) as it is a combination of the best features of both the schemes, in the press release dated 9 September 2015 it is mentioned that GMS would consist of revamped GDS and GML. RBI in its guidelines later clarified that the GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them. RBI also clarified that existing gold metal loan (GML) Scheme would continue parallel to the GMS linked GML. The existing Gold Deposit Scheme (GDS) is in the nature of a fixed deposit in gold. Under GDS, the customers (individuals and institutions) can deposit their idle gold (bullion, coin or jewellery in scrap form) with banks in return for safety, interest earnings and tax benefits. Interest is calculated in Gold currency (XAU) and paid in equivalent rupees. Banks may either issue a passbook/statement of account or a certificate/bond to the depositors for deposit of gold, which will be transferable by endorsement and delivery. Under Gold Metal Loans Scheme of 1998, nominated banks authorized to import gold could give Gold (Metal) loans to jewellery exporters and manufacturers for a period of 90 days. GMS integrates both the above schemes into one with some changes.

It was noted that the Gold Deposit scheme has met with limited success. According to the report of the KUB Rao Committee[2], some of the reasons are (i) high melting costs and (ii) very high ticket sizes. The report acknowledges the fact that in the scheme, since the customers do not get back the jewelleries deposited in its original form, therefore, it has met with limited acceptability in the Indian context, as people have emotional and sentimental attachments with their gold jewels which are lying with them for generations. Various reasons like the lack of infrastructure with the banks for running the scheme, limited number of bank branches authorized to operate GDS, high transaction cost, constraints on the minimum deposit amount etc. explain the limited reach and success of the GDS. The GMS was launched to correct these deficiencies.

 

The Operational Aspects of Gold Monetisation Scheme
The Gold Monetisation scheme consists of the revamped versions of the Gold Deposit Scheme (GDS) introduced in 1999 and the Gold Metal Loan Scheme (GML) introduced in 1998. The detailed operational mechanism alongwith revisions made to the existing schemes are mentioned below.

 

A)  Accepting of Gold Deposits - Revamped Gold Deposit Scheme

 

Thus, from the discussion above, it can be noted that the present scheme is an improvement over the previous version in various respects. The major differences have been summed-up in the table below:

S.No.   GDS (1999) Revamped GDS under Gold Monetisation Scheme
1 Objective To mobilize the gold held by households and institutions in the country
  • To mobilize the gold held by households and institutions
  • To put the gold thus mobilized into productive use.
  • The long-term objective is to reduce the country’s reliance on the import of gold to meet the domestic demand.
 
2 Infrastructure Reliance on the existing infrastructure with banks and Government Mints
  • Banks will be freed from handling physical gold and concentrate on their expertise of banking operations
  • Engage private sector refineries
  • Engage collection centres that are BIS certified
3 Minimum Deposit 500 grams of gold The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams, so that even small depositors are encouraged
4 Time taken for purity verification Minimum 90 days 1 day
5 Tenure of deposit 6 months to 7 years Three options will be made available:
  • short-term : 1-3 years (with a roll out in multiples of one year);
  • medium-term : 5-7 years
  • long-term : 12-15 years
6 Redemption Only in gold
  • For short-term deposits, the customer will have the option of redemption, either in cash or in gold.
  • For medium to long-term deposits, redemption of principal will be in gold (subject to administrative charges) or cash but interest would be paid only in cash..
7 Utilization of gold The utilization of gold was not clearly specified in the scheme. Under medium and long-term deposit options, the deposited gold is proposed to be used for:
  • Auctioning
  • Replenishment of RBI’s Gold Reserves
  • Coins
  • Lending to jewellers

Under short-term deposit

  • Coins
  • Lending to jewellers

 

B) Lending of Gold deposited: Revamped Gold Metal Loan (GML) Scheme


As stated earlier, GMS expands on the framework of gold metal loan scheme. In addition to lending to jewellers, under GMS, the mobilized gold forms a part of reserves of RBI. The existing Gold (Metal) Loan (GML) Scheme operated by nominated banks will continue in parallel with GMS-linked GML scheme. All prudential guidelines for the existing GML Scheme as prescribed in the relevant RBI Master Circular as amended from time to time will also be applicable to the new Scheme.
GMS does not mean to take away the existing loan facilities offered against gold. Loan against gold is a loan product where owner of the gold can avail loan against it. On the other hand, in Gold Monetization Scheme the owner will earn income on the deposited gold and borrowers (jewellers) are getting gold as loans. These are two diverse products and Gold Monetization Scheme is seemed to have no material impact on the loan arrangement.

 

Benefits of the Gold Monetisation Scheme

Government has also launched the dedicated website www.finmin.nic.in/swarnabharat and toll free number 18001800000, which provide all the information of the scheme.


1. The Union Finance Minister shri Arun Jaitley in his Budget Speech observed that “ India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year.  Though stocks of gold in India are estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor monetized.” In this context, he announced that the Government will “Introduce 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.”

2. Working Group to Study the Issues related to Gold Imports and Gold Loans NBFCs in India headed by KUB Rao which submitted its report in Feb 2013.


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