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| Gold Monetisation Scheme |
Gold Monetisation Scheme
Indians love gold and precious stones. Precious stones and metals are the second largest imported items, the top imported item being Oil. Indians imported around 1000 tonnes of gold in 2015 out of which around 100 tonnes was smuggled into the country. The value of this 900 tonnes of legally imported gold was around $35 Billion!The Minerals and Metals Trading Corporation (the government agency that deals in all metals) has estimated that there is about 25,000 tonnes of un-utilized gold available in India. Even then, every year 95% of the annual demand for gold is fulfilled by imports.
This has resulted in reducing the Current Account Deficit (CAD) which is the difference in the inflow and outflow of Foreign Currency in a country. The CAD is now at 1.3% of the Gross Domestic Product (GDP) as compared to 4.3% in 2013.
The Narendra Modi Government has come up with the New Gold Monetisation Scheme to
- to reduce the import of Gold
- to reuse the gold available in the country,
- to use the collected gold in various ways
- to strengthen the reserve requirements (SLR and CRR) of the Central Bank.
The working of the scheme:
1. The Bank creates a tripartite arrangement between itself, Collection and Purity Testing Centres (CPTC) and Refineries.
2. The Customer approaches the Collection and Purity Testing Centres (CPTC) with their gold. The entire process is recorded on camera.
- minimum deposit should be of 30 gms; No limit for maximum deposit.
- the gold can be in the form of - Coins, bars and jewellery (without stones, meena work and impurities)
- The gold will be weighed in presence of customer
- it's purity is assessed and also checked for the absence of prohibited elements such as Iridium, Ruthenium by a XRF machine in presence of the customer
- On the consent of the customer, the gold is melted and again weighed and rechecked for purity. Before melting, the non-gold parts of the item are removed and returned to the customer. If the melted gold is less than 30 gms, then it is returned back to the customer
- equivalent weight of the melted gold will be calculated based on it's purity according to the following formula
Equivalent weight of 995 purity = fineness × weight
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995
- At this point, the customer can choose to take back all the gold that is melted after paying a small fee to the CPTC centre.
- If customer wishes to deposit the gold, the CPTC will issue a Certificate that certifies the weight, purity and equivalent 995 fineness weight of the deposited gold.
- A copy of the certificate is also forwarded to the bank and the refinery with which CPTC has an agreement.
- The packed cast bar is then sent to the refinery that has an agreement with the bank and CPTC
3. The refinery will act as a warehouse to hold the gold, unless the bank wants to keep the gold.
4. The customer approaches the Bank with the CPTC certificate and opens a Gold Deposit Account according to Know Your Client (KYC) norms.
- This account is denoted in grams to record the weight of gold deposited.
- The reference rate for the gold is calculated by using the London AM rate in USD. To this the custom duty rate for gold imports is added. The final rate is still better than the market rate for gold.
- The interest will start accruing one of the following dates, whichever is earlier:
* after refinement or
* 30 days after the receipt of gold at the CPTC or the bank’s designated branch
- The interest rate will depend on the tenure (decided by the customer) and the Interest rate (decided by the Bank). SBI is offering the following rates:
Tenure Govt suggested Interest rate SBI offered Interest Rate Lock in Penalty for early closure
- The deposit will attract CRR and SLR requirements
- On maturity, the interest and the deposited gold will be given to the customer at the gold rate prevalent on that day
5. The collected Gold will be used as follows:
- Short term Deposit gold will be used to sell or lend the gold to
* MMTC for minting India Gold Coins (IGC)
* jewellers
* other banks who are participating in the scheme
- Medium and long term deposit gold
* same as short term gold
* auctioned by MMTC or an agency authorised by Central Government. The money raised through this process will belong to the government
The players: - The following are participating in the scheme
1. Government
2. RBI
3. Scheduled Banks - till now only SBI is participating in the scheme
4. Bureau of Indian Standard (BIS) - has 31 centres across India as Collection and Purity Testing Centres (CPTC)
5. Jewellers - Jewellers are also willing to collect and test gold on behalf of banks. They can also buy or borrow the gold from the banks
6. Refineries - The refineries are accredited by the National Accreditation Board for Testing and Calibration Laboratories (NABL). The refineries are notified by the Central Government for the purpose of handling gold deposited under the scheme
7. customers for this scheme: All the following types of Resident Indians can make deposits under the scheme:
- Individuals, singly or jointly (as Former or Survivor)
- Proprietorship & Partnership firms.
- HUF including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund)
- Companies
Collections:
- First round was from Nov 5 to Nov 20, 2015. Only 400gms of gold was collected.
- Second round was from Jan 18 to Jan 22, 2016. The collection was 900 Kgs where the main contributors were the temples in India
There will be few more rounds or tranches in the future.
Problems:
The scheme has not been able to attract a lot of people even though the government has increased the interest rates and lowered the minimum quantity of gold.
Strengths:
- The maturity quantity of the deposits are exempted from income tax, wealth tax and capital gains tax
- The scheme creates a cheaper source of gold
- If a lot of gold is collected, then it could make gold cheaper in the future
- Lesser gold imports would help improve our CAD
- benefit to banks - for 1 year the banks will get handling charges (including gold purity testing, refining, transportation, storage and any other relevant costs) at a flat rate of 1.5% and commission at the rate of 1% of the gold value mobilised under the scheme.
Weakness:
The major customers of the scheme are temples and trusts and not individuals because:
- Gold jewellery has a sentimental and status value for Indians. Even though the gold may not be used regularly, people may not like the idea of melting it.
- gold coins and bricks are usually purchased with black money. The Government does not talk about how this will be handled and if the source would be safeguarded from tax authorities.
- The scheme may result in an over supply of gold, which would result in lowering it's value. The interest rate offered may not be able to cover the erosion of value.
- the number of CPTC centres are few. The government plans to increase them to 55, and refineries to 20, by the end of the year.
Conclusion:
Gold purchased with black money may not be tapped from this scheme until the government promises no repercussions. This leaves the gold bought with white money. Some of this may not be tapped for sentimental reasons. The remaining gold which is pure white investment, would need better returns for people to get it out of storage.
The government is adding the cost of Customs duty to value the gold at a price higher than the market price, but an oversupply of gold may result in reduction of gold prices in the country. The government needs to factor this loss of value into the interest rate to make it more a more lucrative investment option.
