Gold Monetisation Scheme
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.
- To mobilize the gold held by households, trusts and various institutions in India and put it into productive use.
- To provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks.
- To be able to reduce reliance on import of gold over time to meet the domestic demand, as India is one of the largest consumers of gold with virtually no domestic production. (India 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, most of this gold is neither traded, nor monetized.)
- To make the existing schemes for mobilising Gold (Gold Deposit Scheme and Gold Metal Loan Scheme) more effective and to broaden their ambit from merely mobilizing gold, to putting this gold into a broad range of productive uses including strengthening the reserve requirements of the Central Bank.
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, 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
- Institutions Concerned: The banks will enter into a tripartite Legal Agreement with refiners and Collection and Purity Testing Centres that are selected by them to be their partners in the scheme.
- Collection, Purity Verification and Deposit of Gold: Out of the 331 Assaying and Hallmarking Centres spread across various parts of the country, those which will meet criteria as specified by Bureau of Indian Standards (BIS) will only be allowed to act as Collection and Purity Testing Centres for the purpose of this scheme. The number of these centres is expected to increase with time. The minimum quantity of gold that a person can bring is proposed to be set at 30 grains (corrected upto three decimals). Gold can be in any form (bullion or jewellery) and of any purity standards.
- Creation of Gold Savings Account: In the revamped scheme, a Gold Savings Account will be opened by depositors at any time with Scheduled Commercial Banks, after subjecting themselves to the Know Your Client (KYC) norms, as applicable. This account would be denominated in grams of gold.
- Transfer of Gold to Refiners: Collection and purity testing centres will send the gold to the refiners. The refiners will keep the gold in their warehouses, unless banks prefer to hold it themselves. For the services provided by the refiners, they will be paid a fee by the banks, as decided by them, mutually. The depositor will not be charged. Gold depositors can also give their gold directly to the refiner rather than only through the Collection and Purity Testing Centres (CPTCs). This will encourage the bulk depositors including Institutions to participate in the scheme.
- Features of Gold Deposits:
- Tenure of Deposits: The deposits under the revamped scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period, of 12-15 years (as decided from time to time). While the short term deposits will be accepted by banks on their own account, the latter will be on behalf of Government of India. In other words, the deposit under medium and long term will not be reflected in the balance sheet of the designated banks as they are accepted by the banks on behalf of the Central Government. The receipts issued by the collection and purity testing centers and the deposit certificate issued by the banks state this clearly. Thus, medium and long term deposits are the liability of the Central Government and the banks will hold this gold deposit on behalf of Central Government until it is transferred to such person as may be determined by the Central Government. Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal).
- Interest rate: The amount of interest rate payable for deposits made for the short-term period would be decided by banks on basis of prevailing international lease rates, other costs, market conditions etc. and will be denominated in grams of gold. For the medium and long-term deposits, the rate of interest (and fees to be paid to the bank for their services) will be decided by the government, in consultation with the RBI from time to time. The interest rate for the medium and long-term deposits will be denominated and payable in rupees, based on the value of gold deposited.
- Redemption: For short-term deposits, the depositor will have the option of redemption, for the principal deposit and interest earned, either in cash (in equivalent rupees of the weight of deposited gold at the prices prevailing at the time of redemption) or in gold (of the same weight of gold as deposited), which will have to be exercised at the time of making the deposit. In case the customer likes to change the option, it will be allowed at the bank's discretion. Redemption of fractional quantity (for which a standard gold bar/coin is not available) would be paid in cash. For medium and long-term deposits, redemption will be only in cash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption. The interest earned will however be based on the value of gold at the deposit on the interest rate as decided. Any premature redemption will be in Indian Rupee equivalent or gold at the discretion of the bank.Any Medium Term Deposit will be allowed to be withdrawn after 3 years and any Long Term Deposit after 5 years. These will be subject to a reduction in the interest payable.
- SLR/CRR compliance:The short term bank deposits will attract applicable cash reserve ratio (CRR) and statutory liquidity ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement.
- Utilization of Deposited Gold: The deposited gold will be utilized in the following ways:
- Under medium and long-term deposit, for:
- Replenishment of RBIs Gold Reserves
- Lending to jewellers
- Under short-term deposit
- Lending to jewellers
- Tax Exemption: Tax exemptions, same as those available under GDS would be made available to customers, as applicable. In the Gold Deposit Scheme (1999), the customers received exemption from Capital Gains Tax, Wealth tax and Income Tax.Tax exemptions under the GMS include exemption of interest earned on the gold deposited and exemption from capital gains made through trading or at redemption. In course of an Income Tax Search u/s 132 of the Income Tax Act,1961, gold jewellery to the extent of 500 gms per married lady, 250 gms per unmarried lady and 100 gms per male member of the family, would not be seized by tax authorities.
- Grievance Redressal: Complaints against banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest etc. will be handled first through the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.
- Gold Reserve Fund: The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The difference between the current borrowing cost for the Government and the interest rate paid by the Government under the medium/long term deposit will be credited to the Gold Reserve Fund. The benefit to the Government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.
The banks accepting such deposits may sell or lend the gold accepted under short term tenure to Metals and Minerals Trading Corporation of India (MMTC) for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under medium and long term tenure will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds are credited to the Central Government’s account with the Reserve Bank. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above.
Banks are advised by RBI to put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from volatile gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.
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||
|2||Infrastructure||Reliance on the existing infrastructure with banks and Government Mints||
|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:
|6||Redemption||Only in gold||
|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:
Under short-term deposit
B) Lending of Gold deposited: Revamped Gold Metal Loan (GML) Scheme
- Gold Metal Loan Account: A Gold Metal Loan Account, denominated in grams of gold, will be opened by the bank for jewellers. The gold mobilized through the GMS or revamped GDS, under the short-term option, will be provided to jewellers on loan, on the basis of the terms and conditions set-out by banks, under the guidance of RBI. The banks can also purchase the gold auctioned under medium and long term tenure and extend GML to the jewellers.
- Delivery of gold to jewellers: When a gold loan is sanctioned, The jewellers will receive the physical delivery of gold either from the refiners or from the designated bank, depending on the place where the refined gold is stored. The banks will, in turn, make the requisite entry in the jewellers’ Gold Loan Account.
- Interest received by banks: The interest rate charged on the GML will be decided by banks, with guidance from the RBI.Banks are free to hedge their positions in the case of short-term deposits.
- Tenor: The tenor of the GML at present is 180 days. Given that the minimum lock-in period for gold deposits will be one year, based on experience gained, this tenor of GML may be re-examined in future and appropriate modifications made, if required.
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
- The scheme will help in mobilizing the large amount of gold lying as an idle asset with households, trusts and various institutions in India and benefit the Indian gems and jewellery sector which is a major contributor to India's exports. In fiscal year 2014-15, gems and jewellery constituted 12 per cent of India's total exports and the value of gold items alone was more than $13 billion (provisional figures).
- The mobilized gold will also supplement RBI’s gold reserves.
- It will help in reducing the Government’s cost of borrowing.
- Over the course of time this is also expected to reduce the country's dependence on the import of gold.
Government has also launched the dedicated website www.finmin.nic.in/swarnabharat and toll free number 18001800000, which provide all the information of the schemes.
- Report of the ‘Working Group to Study the Issues related to Gold Imports and Gold Loans NBFCs in India’ headed by KUB Rao (Feb 2013)
- Press Release on ‘Introduction of Gold Monetization Schemes’ dated 9th September, 2015
- RBI Notification dated 5th October, 1999 on the Gold Deposit Schemes
- RBI Notification dated 5th September, 2005 on the Gold Metal Loan scheme
- Reserve Bank of India (Gold Monetization Scheme) Direction, 2015 dated 22 October 2015
- Swarnabharat Yojna Website