Gold Monetisation Scheme: A 24-carat question, Interest Rates

Experts say that rates have to be attractive enough for citizens and institutions to take interest in the scheme.

Written by Sandeep Singh | New Delhi | Updated: May 22, 2015 6:12 am
gold, gold loan, gold price, gold monetisation scheme, Gold Deposit Scheme, wealth tax, income tax, indian express, business news Industry insiders feel that the interest rates, to be offered, have to be attractive enough for citizens and institutions to bring their jewellery, gold coins and bars out.

On Tuesday, the Central government came out with its much-awaited draft gold monetisation scheme with an aim to bring household and institutionally held gold within circulation, lend it to jewellers as raw material and bring India’s gold import down. The scheme allows a minimum deposit which can be as low as 30 grams by individuals and even talks of exempting gold deposit from capital gains tax, income tax and wealth tax.

However, industry insiders feel that the interest rates, to be offered, have to be attractive enough for citizens and institutions to bring their jewellery, gold coins and bars out.

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Though several gold monetisation schemes have been launched in the past, they failed as they offered low interest rates to the investors — in the range of 0.75 to 1 per cent. While bankers have the freedom to take a call on the rates they want to offer, they are saying that the interest rate has to be in the range of 4 to 6 per cent in order to attract customers, in case they are willing to let their jewellery and coins melt.

“It is possible to offer an interest rate of 4-6 per cent as banks can earn their revenue by further lending it to the jewellers, which is a big market,” said a senior official with a leading private sector bank. He, however, added that the rates to be offered will also depend on the guidelines laid down by the Reserve Bank of India as it may put a limit on how much of the gold with the bank can be used for lending purposes.

goldyThere are others who agree to this and point that rates have to be comparable to savings bank rate.

“In terms of customer interest, only if the rates are slightly higher and are comparable to savings bank rates of around 4 per cent or more, it will generate interest and excitement as it will be comparable to a pre-tax return of around 6 per cent,” said I Unnikrishnan, non-executive director, Manappuram Finance.

While the gold deposit scheme of 1999 allowed a minimum deposit of 200 grams of the yellow metal, the draft of the new scheme proposes to accept a minimum deposit of 30 grams, thereby widening the scope of the scheme and attract even the lower income category individuals to participate in the scheme and earn interest income on their gold holding.

Though the scheme awaits more clarity, financial planners are saying that gold investors should go for it.

The unanswered questions

While the scheme talks of exemptions from taxes, it is silent on the amount of interest that banks will pay. Some experts point that as banks currently lease gold from overseas market at 1 per cent interest or even at lower rates, there has to be some incentive for them to offer higher rates to gold depositors in India. While bankers are agreeing that a higher interest rate offering is a possibility, it remains to be seen as to what rates are finally offered.

“The government has incentivised banks by way of making the mobilised gold as part CRR/ SLR, but it would depend on the bank as to how much of the benefit it will pass to the depositor. Something like 5-6 per cent interest rates are required to entice investors,” said Chirag Mehta, Fund Manager- Commodities, Quantum AMC.

Another important aspect that has not been clarified is whether the customer will be allowed to bring only gold purchased from accounted money (tax-paid income) or even those purchased from unaccounted income. This may be a big issue as traditionally most of the gold purchased in India has been in cash and even the traditional jewellers in the past did not provide proper receipts to the buyer. So there may be a lot of unaccounted gold in possession of individuals for which they may not be able to provide an answer.

goldy 2“If the government wants only gold bought from tax-paid income then I don’t know how much it will succeed as most of the gold in India is bought from unaccounted income. It remains to be seen as to how are they going to be fair in this black vs white debate,” said Jamal Mecklai, CEO of Mecklai Financial Services. On the other hand some say that if the government comes with a policy of not asking any question on how the gold was purchased then it may lead to a situation where people may buy gold from their unaccounted money and deposit it with the bank within this scheme that may infact lead to increased demand for gold.

Should you look forward to it?

Even though the scheme allows individuals to bring their gold held in the form of jewellery, coins and bars, to be melted and deposited, many Indians especially women may not be willing to part with their gold jewellery. Financial experts however see this as a good option to earn income from their idle gold. If banks offer anywhere between 4 and 6 per cent which is non-taxable then the pre-tax comparable return will stand at anywhere between 5.7 and 8.6 per cent.

“I certainly think that people should go for it. While gold coins and bars should be deposited in the scheme, even women may look to deposit their jewellery that they do not generally wear,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Experts feel that initially the investment part of gold (coins and bars) will get monetised and as people become comfortable they may even look to part with the consumption gold (jewellery).

Some feel that while prices have not moved much over the last couple of years, gold investors may find it as a good option to at least earn some interest income by depositing it in the scheme.

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