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Concepts & Tutorials

The Gold Monetization Scheme: The What, The How and The Capital Mind View

The government has released Draft Guidelines for the new Gold Monetization Scheme.

In Budget2015,  Jaitley had mentioned this. Essentially you can deposit gold with banks and they’ll give you interest (in Gold!) of something like 1% a year, and you are expected to rush to the nearest bank and dump all that yellow metal you have, and save India tons of money in valuable foreign exchange because we import gold like crazy.

The contours of the scheme are in. They’re yet to be finalized, but at least we have something.

Here’s the Process.

You don’t go to a bank. This might sound a little stupid, but bear with us please.

You go to a Purity Testing Center, called a Hallmarking Center. These guys tell you the “genuine” nature of your gold. You give them the gold, they do a prelim test on an XRF machine, and tell you approximate values of pure gold that you’ve given. You don’t like it? You walk away. Time spent: 45 minutes. Cost: we don’t know yet.

Then you fill up a “KYC” form, and give your consent to melt your gold. Which means they melt it and remove any other stuff like studs or stones (typically added to jewellery). Then then do a fire assay test and tell you how much gold you really have.

Time: 3 to 4 hours.

Cost: Rs. 500+ for melting, Rs. 300 for the fire test, and melting losses at actuals. Rs. 100 or so for removing stones. At least Rs. 1000.

My Gold’s Melted, Now What?

The fire test tells you how much gold you really have. You can say no, I don’t like it. Then you walk away with your gold in the form of a gold bar, for which there is another charge. We don’t know how much.

But let’s say you agree with their estimate.

You then say “gimme a deposit certificate”, which just says the center has X amount of gold of Y purity. The gold is then deposited at the center and sent to a “refiner” or to a bank for holding.

Note: Minimum 30 grams, which is about Rs. 85,000 worth of gold.

Now You Go To The Bank

And you give them the deposit certificate. The bank opens a gold savings account for the customer; and has an interest rate. The interest is paid either:

  • as gold, so if you put 100 grams at 1% a year, you get 101 grams after a year
  • as cash, so if you put 100 grams at 1% a year, you get cash worth 1 gram of gold after one year (valued at the time the interest is paid, which might even be monthly)
  • You gotta choose one of the above when you create the account.

Loans are for 1 year or multiples of 1 year, but you can “break” the deposit and redeem earlier (the interest rate will be lower).

Wait, How Do Banks Earn This Extra Gold?

Well, they can lend it to jewellers. Jewellers might be happy to pay back 1.5% a year, or even more, to compensate the banks risk.

Banks can sell the gold abroad, and earn forex. They can even sell it in domestic exchnages. they will however have to buy back the gold if it is redeemed by investors, and the price risk has to be hedged appropriately.

Banks may be able to use the gold as CRR, the Cash Reserve Ratio. Because gold is like cash.

Taxes

They want to make the returns exempt on both capital gains and income tax.

It is however fairly clear that if you deposit large quantities of gold and haven’t really paid income taxes, someone from the tax department will ask questions. This is fair. You don’t want to encourage black money through this scheme.

What We Think

The scheme applies only to large cities, we think. There are currently ZERO testing centers in the north east. Zero in Goa. Just 14 in all of UP, 5 in MP, 3 in Bihar, 1 in Chhatisgarh, 1 each in Jharkhand, Himachal and Jammu/Kashmir. Oh, there are 39 in Kerala and 57 in Tamil Nadu, so those are interesting.

It’s going to take too much time. A full day at the purity center for one. Another day at the bank.

It’s also too much money as fees. There’s a melting fee, a stone removal fee, a test fee, a refining fee, a holding fee and who knows what other charges. All of these are going to be passed on to the customer. Unless you have gold of more than 5 lakh rupees, you’re probably not even going to recover the fees in a year. So this, and the fact that there are too few centers, means the poor and the “small” won’t make it.

There’s no mention of how temples can do this. Temples should be encouraged to give their gold over. They don’t need it, and it’s safe with a bank. But this has simply not been addressed. Without temple participation, this scheme has very little real application.

The process of redemption isn’t clear. What if you don’t get the right quality of gold? What if, when you take the redeemed gold to a different jeweller, tells you there’s a purity issue? Who do you complain to? There has to be a better answer than the banking ombudsman, or a consumer forum. No one has that kind of time – they should create a framework for redressal.

Overall, we would view this sceptically until we actually see gold move in. We think the draft can be improved upon, in terms of addressing time/cost and redressal concerns, and bring temples a better way to do things.

  • Rajashekhar T Shedole says:

    Good writing Deepak. My query is regarding the source of gold i,e if a person who has gold more than 300gms let us say about 800gms to 900gms, Is he required to disclose source of gold and any chance of tax on disclosed gold in future (retrospectively).Yours comments on it.

    • I don’t think they will bother with something as little as 900 grams. At that level, you can easily say it was ancestral gold that passed to you through generations etc. There is no “record” of that, obviously.
      I think they might only ask questions if gold is > 1 cr. Otherwise everyone who owns gold even legitimately will be too scared because they may not have the bills etc.

  • Ramki says:

    Purity Testing Centers aka Hallmarking centers are not nuclear power plants/dams and surely with some investment by banks we can establish a lot of them in every district in this country. And with some incentive to jewelers/middlemen, we can get lot of people to participate to make whole process quicker. So that is not going to be roadblock. Real issue is need to educate the millions of gold investors in India to accept this and that requires 1) Lot of campaigning 2) Lot of patience. Let us not throw cold water on this but rather hope government shows tenacity to pursue this idea, If i remember right previous gold deposit scheme failed because government gave up without putting effort
    PS – Too much focus on religious institutions owning gold is unwarranted given that we are a secular state and clearly have no idea on what gold owned by religious institutions really means to people who follow a faith. Let us focus on the gold owned by individuals which itself is a big lot IMO

    • Ramki – temples are the only real bet. They don’t need the gold they own (usually donated) to be in ornament form; they can easily store with banks and use as gold when they want by withdrawing. ANd then the pilfering of this gold by committees, currently opaque to even the people that donate, will slow. If you can’t get temples to participate, individuals will simply not do so. If a temple won’t trust the government or this system, then why should an individual do so?
      There is no point doing this without temples. In fact, if temples do so, then many others will follow.
      Right now, though, the plan needs a lot more colour. Temples for instance won’t pay all those charges, just to get something assessed and put in a testing center and all that. This bit has to be appropriated through the pricing.

  • rkg says:

    The better way will be to create a Gold Bank – which will be the central agency to manage the risks associated with the metals. For Banks, it should be like the erstwhile FCNR (B) scheme where banks would sell to RBI at a notional rate under various lots. The Gold Bank will take over a similar role – so that commercial banks only have the interest bearing liability in the book and the risk is entirely managed by a professional central agency.
    Banks are already seeing a polarized knowledge base and their absence of expertise in a product like this will be fountainhead of another round of novel frauds.

  • kaushik says:

    Who gives the guarantee of the gold return? As like 1lakh incase of savings account is there any fine prints? Ppl need to be aware and cautious about the motive. No one is doing charity here and we need to know the risk clearly what we are bearing.

  • rkg says:

    … and the idea of melting my legacy gold (ornaments) for the purpose of a 1% interest, is itself a sentimentally unacceptable idea
    Unless (as Deepak rightly suggests) temple gold starts moving to refiners, this will be a poor starter.
    Banks get the benefit of Reserves exemption only if they seek the Gold in their books (ironically, the deposit will be part of NDTL and the physical gold will be an asset eligible for reserves-exemption – so you have a 100% reserve free money!!!)

  • Vineet says:

    Governments come and go all the time, whereas ancestral gold is accumulated over hundreds and in some cases thousands of years. I think the average Indian understands this very well. This will be a non-starter with individuals, for temples it’s a different story.

  • esotericBlue says:

    one point in owning gold is to have a store of wealth (resources) with oneself, away from institutions and/or government. and, that is immune to a currency meltdown. isn’t that the reason why gold has been sought over mankind’s history?
    the time to conceive and implement this scheme could have been channeled into other efforts. would even a single brain who came up with this proposal in the first place part away with his/her Au?