Changes in Gold Monetization Scheme

Gold Monetization scheme was launched to mobilize the Idle Gold lying with Indian households & temples which is estimated up to 20000 tones & cut on India's gold import which may touch a gigantic 1000 ton a year thus reduce pressure on current account. Scheme will facilitate the depositors of gold to earn interest on their metal accounts. Once the gold is deposited in metal account, it will start earning interest on the same. The tenure of gold deposits is likely to be for a minimum of 1 year. The minimum quantity of deposits is pegged at 30 gram to encourage even small deposits. The gold can be in any form, bullion or jewellery. Gold collected will be cleaned & melted to measure purity at test centers. The bank will use these deposits to make loans to others and receives interest in return. The difference between the interest paid and received is the bank's income.

Why reforms were needed:

Monetization scheme allows earning some regular interest on gold if put in Gold Account and saves carrying costs as well; however, it attracted only 400 grams of gold in 1st 2 week & 900kg of gold as of 20 January 2015. . Banks and consumers received the scheme coldly. Factors behind it are:

1) Emotional & cultural connect of Indians with gold ornaments. Provision of melting them & convert in pure bars may be a great hurdle.

2) Lack of collection & Purity Testing centers across the country.

3) Interest rate offered for short & medium term (2.25%) is not even enough to recover the making charges of jewelry which are in between 15 to 18%.

4) Disclosure of source & ownership proof may inhibit investors.

5) Unavailability of premature withdrawals options & penalty charges.

New changes & how they impact:

1) Government will pay banks a total commission for the 1st year to incentivize their participation in popularizing the scheme. This commission includes 1.5% for handling charges and is expected to encourage crucial support as similar programs failed in the past as a result of negligible returns for banks.

2) Premature redemption under Medium and Long Term Government Deposits (MLTGD), Any Medium Term (5-7 Years) Deposit will be allowed to be withdrawn after 3 years and any Long Term (12-15 Years) Deposit after 5 years, however this may reduce interest rates. Early withdrawal will provide flexibility to peoples. 

3) Gold depositors can also give their gold directly to the refiner rather than only through the Collection and Purity Testing Centers (CPTCs). This will encourage the bulk depositors including Institutions to participate in the scheme.

4) Bureau of Indian Standards (BIS) has modified the licensing condition for refiners already having National Accreditation Board for Testing and Calibration Laboratories (NABL) accreditation from the existing 3 years refining experience to 1 year refining experience. This is likely to increase the number of licensed refiners.

5) BIS has published an Expression of Interest (EOI) on its website inviting applications from the more than 13,000 licensed jewelers to act as a CPTC in the scheme. this will improve the infrastructural support by penetration of collection centers.

6) The quantity of gold collected under the scheme will be expressed up to three decimals of a gram. This will give the consumer better value for the gold deposited.

7) Banks are free to hedge their positions in the case of short-term deposits.

8) Government has also launched the dedicated website and toll free number 18001800000, which provide all the information of the schemes & popularize it.

9) Government clarified that 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.

10) Gold to be deposited with the CPTCs/Refineries can be of any purity. The CPTC/Refiner will test the gold and determine its purity which will be basis on which the deposit certificate will be issued.

Other Reforms required & way forward:

Still there are issues which need to be resolved to make the scheme a success. The interest rates are too low to encourage the large scale participation, scheme need the interest rate revision. An Indian do not wants to see his long-preserved, family-inherited, emotionally-critical, piece of yellow metal lose its identity and 'feel' by melting it. The government can offer a choice to the customer with respect to the melting of the ornament. A differential rate of interest can be offered on melted and non-melted gold. This can be done still not compromising on the purity assessment. Someone who isn't willing to melt his ornaments will have to settle with a lower rate of return. To resolve the issue of ownership & to check the inflow of smuggled gold, the government can partly address the problem to a certain extent by making invoices mandatory only for gold brought in the form of bars or coins and not necessarily for household ornaments. The banks can track the transaction with sufficient proofs on address and identity. In case, the quantity exceeds a particular limit, even on ornaments, questions can be raised.