Pradhan Mantri Gold Yojana Scheme

Gold Monetisation Scheme

The Gold Monetisation Scheme is an initiative for the growth of the national capital by our
Prime Minister and will be effective from 5th November 2015. The new Gold Monetisation
scheme will replace the present Gold deposit scheme which was launched in 1999. But people
who have already invested in the old scheme shall reap their benefits till the maturity of the
earlier schemes.

Who can benefit from the scheme?

All the citizens and residents of India, Hindu Undivided Families, Trusts including Mutual
Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and
Companies) can invest in this scheme and benefit from it. Anyone can invest minimum 30 grams
of Gold at a time and there is no maximum limit set for investing as of now by the Government
of India.

What is the investment tenure for this scheme?

The banks accept the gold deposits for varied time frames. There is a short term period for 1-3
years, medium time period for 5-7 years and long term deposit for 12-15 years. Investments for
short terms will be accepted by the authorised banks while investments for the rest two time
terms shall be deposited with the government. There would be a minimum period in which the
investors cannot withdraw the gold deposits and even in case of premature withdrawal (in case of
short term deposits), there would be a penalty charged. The rate of interest for short and medium
time periods will be 2.25% whereas for long tenure investments will be 2.5%. The interest will
be calculated from the day the gold is accepted by the bank or from the day gold is converted.
Till the maturity of the scheme the banks would keep the gold deposits safely under their
custody. For opening the Gold deposits accounts the investors would require the same
documentation and formalities as in case of any other account opening.
This Gold is then used by IGC or sold to jewelers. Even the banks who are a part of the GMS
chain buy the gold deposits. This gold is further auctioned and bought by the RBI and credited to
the account of the Central Government. Further this Gold is bought by the banks and other
authorized entities for hedging and risk management. The guidelines issued by the RBI are
abided to for hedging. The motive of the GMS is to circulate the gold held by the citizens of
India for the productivity and growth of the country, so that importing of Gold can be minimized.

Sovereign Gold Bond Scheme

The Sovereign Gold Bond scheme is an initiative to replace Gold with bonds. These bonds
would be issued by the Government of India and applications will be accepted from 5 November,
2015. All the authorised banks and post offices would issue the Gold bonds from 26 November,
2015.

Who all can invest in the Sovereign Gold Bond Scheme?

All the residents of India, HUF, trusts, Universities and charitable institutions can buy these
bonds. These bonds will be available in multiples of 1 gram of Gold. The lock-in period or
minimum time for these bonds is 5 years and the total period is of 8 years. The minimum
quantity of gold bonds available is 2 which equalises to 2 grams of Gold. Whereas, the maximum
limit allotted for one person is 500. A verification process for self- declaration is a part of the
mechanism. The rate of interest is fixed for 2.75% per annum calculated on the principal amount
and will be payable after every 6 months. The price of the bonds would be set according to the
average of the Gold price in the prior week before investing and then the amount will be
converted to Indian currency. After the maturity of the bonds the payment would be made
through cash, DD or cheque along with a Certificate issued for the investor. The amount can also
be used for Demat accounts.

Gold Coin Scheme

The Indian Government has introduced the first Gold coin minted in our country. The coin has
the national Emblem on one side and Mahatma Gandhi on its other side. The coins will be made
in 5, 10 and 20 grams of Gold and only 15000 5grams coins, 20,000 10 grams coins and 3750 20
grams coins will be issued initially. These coins will be packed in a tamper proof packing and
would be available at MMTC outlets, authorised banks and post offices. The purity of these coins
will be 24 karat and the fineness will be 999. As a certificate of purity these coins will also have
a BIS stamp.
All you need to know about gold monetisation scheme

 S. Varadharajan

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This new scheme would allow the depositors of gold to earn interest in their
metal accounts.

While announcing several steps for monetising gold in his Budget 2015-16, Union Finance
Minister Arun Jaitley stated that stocks of gold in India were estimated to be over 20,000 tonnes
but mostly this gold was neither traded, nor monetised.

Mr. Jaitley proposed a Gold Monetisation Scheme, which would replace both the present Gold
Deposit and Gold Metal Loan Schemes. He said the new scheme would allow the depositors of
gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal
account. Banks/ other dealers would also be able to monetise this gold.

The Finance Minister also announced the development of an alternate financial asset, a
Sovereign Gold Bond, as an alternative to purchasing metal gold. The bonds would carry a fixed
rate of interest, and also be redeemable in terms of the face value of the gold, at the time of
redemption by the holder of the bond.

Mr. Jaitley also announced that the Government shall commence work on developing an Indian
Gold Coin, which will carry the Ashok Chakra on its face. Such an Indian Gold Coin would help
reduce the demand for coins minted outside Indian, and also help to recycle the gold available in
the country.

What is gold monetisation scheme?

It is a scheme that facilitates 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.

How it generally works?

When a customer brings in gold to the counter of specified agency or bank, the purity of gold is
determined and exact quantity of gold is credited in the metal account. Customers may be asked
to complete KYC (know-your-customer) process. The deposited gold will be lent by banks to
jewellers at an interest rate little higher than the interest paid to customer.

How is the interest rate calculated?

Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For
example if a customer deposits 100 gm of gold and gets one per cent interest, then, on maturity
he has a credit of 101 gram.

The interest rate is decided by the banks concerned.

What is the tenure?

The tenure of gold deposits is likely to be for a minimum of one 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.

How the redemption takes place?

Customer will have the choice to take cash or gold on redemption, but the preference has to be
stated at the time of deposi

 Yes your plan has helpful for public, but my question is gold rate is not fix as same rate, its
fluctuating how u pay interest to public, n how the public has to be understand about this scheme
n about interest also.......

8 months ago
(0) · (0)
reply (0)
 RJ RAVI JAIKUMAR

at the time of redemption,will we get back the same jewellery that we deposited??

8 months ago
(0) · (0)
reply (0)

 V. Ramaswami

This is a wonderful idea. For the individual owner of gold, this turns a passive asset into one
earning money. For the country, it increases its gold reserve by orders of magnitude. BUT, how
will one reign in the escalation of the rupee and its consequences on exports as well as inflation
that could occur internally? More transparency is needed on the econometric models used and
their predictions so that they can be examined by experts with diverse perspectives.

1885
8 months ago
(0) · (0)
reply (0)
 C Chinta

Recently, the Prime Minister of India went on record, to say that even B J P was wrong in the
passage of the "Land acquisition Act 2013" and that is why, he now wants to change the law. The
question is , if someone deposits,say, 100 grams,now ,seeking redemption in gold on maturity,
according to present LAW, is there any one to clarify that the law will not be changed,to redeem
in rupees, or otherwise, stating that , the LAW is changed because, the government was wrong
previously?

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4. Gold Monetisation Scheme, Sovereign Gold Bonds Scheme, Indian gold coin launched

Gold Monetisation Scheme, Sovereign Gold Bonds Scheme, Indian gold

coin launched

Three gold schemes were launched today. The Gold Monetisation Scheme
(GMS), 2015 will offer option to resident Indians to deposit their precious
metal and earn an interest of up to 2.5 per cent...
By: FE Bureau | November 5, 2015 9:50 PM

Three gold schemes were launched today. The Gold Monetisation Scheme (GMS), 2015 will
offer option to resident Indians to deposit their precious metal and earn an interest of up to 2.5
per cent; while under the Sovereign Gold Bonds Scheme, investors can earn an interest rate of
2.75 per cent per annum by buying paper bonds. The first ever Indian gold coin & bullion was
also unveiled. “These schemes will be transformative for the Indian gold industry. However, the
expectations from the schemes in the short term must be tempered as it will take time to build the
infrastructure and products and for customer acceptance to grow,” said World Gold Council MD
(India) Somasundaram PR. Here are top 5 points you must know:

1. The Gold Monetisation Scheme 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.

2. The minimum deposit for the raw gold (bars, coins, jewellery excluding stones and other
metals) should be equivalent to 30 grams of 995 fineness – there is no maximum limit for
deposit.
3. With regard to gold bonds, the RBI in consultation with the Centre has decided to issue such
instruments carrying an annual interest rate of 2.75 per cent.

4. Applications for the bonds will be accepted from November 5-20 and bonds will be issued on
November 26. These bonds will be sold through banks and designated post offices.

5. The borrowing through issuance of such bonds will form part of the government’s market
borrowing programme.

6. Aimed at providing an alternative to buying physical gold, the bonds scheme will offer
investors a choice to buy bonds worth 2 grams of gold, up to a maximum of 500 grams.

7. This is the first tranche of the gold bond scheme and subsequent tranches would be notified
later.

8. The tenor of the bond will be for a period of eight years with exit option from fifth year to be
exercised on the interest payment dates.

9. The Sovereign Gold Bond scheme offers host of benefits including additional interest of 2.75
per cent per annum on the initial purchase price, said Nitin Chugh, Head, Digital Banking,
HDFC Bank.

10. Yes Bank launched the Sovereign Gold Bonds Scheme at major branches across the country
and is in the process of fine-tuning its launch of the Gold Monetisation Scheme.

RBI Issues Norms for Gold Monetisation Scheme: 10 Facts

NDTV | Last Updated: October 26, 2015 08:07 (IST)

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The Reserve Bank of India (RBI) has issued norms for implementation of the gold monetisation scheme.
Banks are now putting in place the requisite processes and the exact date of implementation of the
scheme will be announced soon, the RBI said. Prime Minister Narendra Modi has said the government
will launch gold monetisation scheme next month.

Here are 10 things to know:

1) Under the gold monetisation scheme, customers can deposit their gold and earn interest on it.

2) The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and
other metals) equivalent to 30 grams of the precious metal of 995 fineness, the RBI said. There is no
maximum limit for deposit under the scheme.

3) All scheduled commercial banks have been allowed to offer this scheme. The designated banks are
free to fix the interest rates on these deposits, the RBI said.

4) The principal on maturity and interest will be linked to the prevailing price of gold at that time. The
depositor will have the option to either take it in gold or equivalent rupee terms. At the time of opening
the gold deposit account, the investor has to specify the option and once chosen it cannot be changed.

5) Under this scheme, banks will be allowed to accept three kinds of deposits: short-term (maturity
between 1 to 3 years), medium-term (5 to 7 years) and long term (12-15 years.)

6) All gold deposits under the scheme shall be checked at collection and purity testing centres which will
be notified by the government.

7) There will be provision for premature withdrawal subject to a minimum lock-in period and the penalty
will be determined by individual banks.
8) Joint deposits of two or more depositors will be allowed under the scheme. The existing rules
regarding joint operation of bank deposit accounts including nominations will be applicable to these gold
deposits.

9) Resident Indians and mutual funds/exchange traded funds registered under market regulator Sebi can
make deposits under the scheme.

10) The objective of the scheme is to mobilize a part of an estimated 20,000 tonnes of gold held by
households and institutions in the country and to reduce India's reliance on the import of gold. The
Cabinet has approved the scheme.

he central bank has released a direction to banks for the implementation of the Gold
Monetisation Scheme, 2015. The scheme was first spoken about in the 2015-16 budget statement
by Finance Minister Arun Jaitley. However, it was later announced on September 15th.

Gold monetisation schemes will help monetise gold worth nearly Rs 60 lakh crore held by
households and institutions.

Here are 10 important things to know about the directive:

1) The Gold Monetisation Scheme will replace the Gold Deposit Scheme of 1999. However,
people who have deposited gold under the deposit scheme need not worry. All the gold deposited
under the 1999 scheme will be allowed to run till its maturity date, unless the depositor
withdraws it prematurely.

Also Read: Government to launch gold monetisation scheme, gold sovereign bonds ahead of
Dhanteras

2) Who can park gold under monetisation scheme?: 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.

3) Minimum/ maximum deposit: 30 grams of 995 finenes in raw gold (bars, coins, jewellery,
exclusind stones and other metals). There is no maximum limit under the scheme.

Also Read: Gold monetisation scheme: Should you invest in it?

4) Who will accept the gold?

The collection and Purity Testing Centres (CPTC) certified by the Bureau of Indina Standards
(BIS) and notified by the Central government under then scheme, will accept the gold. Against
the gold deposited in the scheme, banks will issue deposit certificates in equivalence of 995
fineness of gold.

5) Tenure: Banks will accept gold for short term investment of one to three years, medium term
deposit of five to seven years, and long term deposit of 12 to 15 years. While designated banks
can accept deposits for short- and medium-term deposits, long-term deposits will be accepted on
behalf of the government.

Also Read: Government approves 'Gold Monetisation Scheme': All you need to know about it

6) Interest payout: Interest on deposits under the scheme will start accruing from the date of
conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt
of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.

7) KYC: Depositors interested in depositing gold under the scheme will be subject to the same
KYC norms and identification applicable to opening a bank deposit account.

Also Read: Why the government got it completely wrong with its gold monetisation scheme

8) Grievances: Complaints against designated banks regarding any discrepancy in issuance of

receipts and deposit certificates, redemption of deposits, payment of interest will be handled first
by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

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9) Premature withdrawal: Individual banks will determine a provision for premature

withdrawal subject to a minimum lock-in period and penalty.
Prime Minister Narendra Modi has just launched the gold monetisation scheme in New Delhi,
along with gold sovereign bonds and the Indian gold coin. The schemes were launched on
schedule ahead of Dhanteras, as targeted by the government.

Ahead of the launch, the Reserve Bank of India (RBI) had released a circular for the
implementation of the Gold Monetisation Scheme, 2015. The scheme was first spoken about in
the 2015-16 budget statement by Finance Minister Arun Jaitley.

Gold monetisation schemes will help monetise gold worth nearly Rs 60 lakh crore held by
households and institutions.

ALSO READ: Gold monetisation scheme, two others launched by PM Modi

Here are 10 important things to know about the directive:

1) The Gold Monetisation Scheme will replace the Gold Deposit Scheme of 1999. However,
people who have deposited gold under the deposit scheme need not worry. All the gold deposited
under the 1999 scheme will be allowed to run till its maturity date, unless the depositor
withdraws it prematurely.

2) Who can park gold under monetisation scheme?: 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.

3) Minimum/ maximum deposit: 30 grams of 995 finenes in raw gold (bars, coins, jewellery,
exclusind stones and other metals). There is no maximum limit under the scheme.

Also Read: Gold monetisation scheme: Should you invest in it?

4) Who will accept the gold?

The collection and Purity Testing Centres (CPTC) certified by the Bureau of Indina Standards
(BIS) and notified by the Central government under then scheme, will accept the gold. Against
the gold deposited in the scheme, banks will issue deposit certificates in equivalence of 995
fineness of gold.

5) Tenure: Banks will accept gold for short term investment of one to three years, medium term
deposit of five to seven years, and long term deposit of 12 to 15 years. While designated banks
can accept deposits for short- and medium-term deposits, long-term deposits will be accepted on
behalf of the government.

6) Interest payout: Interest on deposits under the scheme will start accruing from the date of
conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt
of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.
7) KYC: Depositors interested in depositing gold under the scheme will be subject to the same
KYC norms and identification applicable to opening a bank deposit account.

Also Read: Why the government got it completely wrong with its gold monetisation scheme

8) Grievances: Complaints against designated banks regarding any discrepancy in issuance of

receipts and deposit certificates, redemption of deposits, payment of interest will be handled first
by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

9) Premature withdrawal: Individual banks will determine a provision for premature

withdrawal subject to a minimum lock-in period and penalty.

0 Comments

Gold monetisation scheme: Higher interest rate is a master stroke by

govt

by Dinesh Unnikrishnan Nov 4, 2015 11:40 IST

#Black money #Gnanasekar Thiagarajan #gold deposit #gold monetisation scheme #Interest
rate #PM Modi

102 Comments

 47

 1

For those who possess gold as an investment asset, the higher rate of interest (2.25 percent to 2.5
percent) offered by the government under the gold monetisation scheme (GMS), which will be
launched by Prime Minister Narendra Modi on Thursday, is a an opportunity.
This rate of interest is attractive considering that till now gold deposit schemes offered by banks
have been offering much lower return (up to 1 percent).

The decision to offer higher rate of return is a master stroke by the government, which has been
striving to make this scheme work. As Firstpost has noted before, offering interest rate was
critical to make the GMS attractive since there is not much appetite on the part of public
otherwise to invest their household gold.

AFP

“For people who have gold as an investment asset, it is a good opportunity to gain some interest
out of it,” said Gnanasekar Thiagarajan, director of Commtrendz Risk Management.

“Gold is always written off as a zero-yield instrument compared to equities, which give dividend
and fixed income which gives fixed interest. The GMS scheme might help to thrash that image,”
Thiagarajan said.

Going by the structure of the GMS, an individual or entity can walk into a test centre and get the
gold melted, purity assessed and converted into bars, against which the bank will issue a
certificate to the holder.

On this deposit, the customer earns an interest rate decided by the bank, which will be exempted
from income, wealth or capital gains taxes. On maturity, the customer can get the gold or cash
back plus interest amount.

The government has notified to offer a rate of 2.25 percent on medium-term deposits (5-7 years)
and 2.5 per cent on long-term deposit (12-15 years). The current scheme is pretty much same as
the gold deposit scheme that has been in existence for long.
One key difference between the two is the minimum quantity of gold that can be monetised. This
has been brought down to 30 grams in the GMS compared with 500 grams under the existing
gold deposit scheme. Hence, this time, the government seems to target HNIs and households
rather than temples and trusts.

The government hopes to mobilise at least part of the idle gold stock lying in the households and
institutions in the country (estimated around 20,000 tons) and use it for productive purpose. India
is the largest importer of gold in the country with annual gold imports around 800 tons.

The government wants to bring down the reliance on gold imports, which constitute a significant
part of India’s import bill after crude oil and thus address the stress on country’s current account
deficit.

May not be a big hit still

The chances of GMS becoming a big success are still doubtful considering the approach of
Indian consumers towards gold.

Most Indians look at gold linked to tradition and customs, rather than as a mere investment asset.
Parting with their gold ornaments, even the idle ones, is a last resort for her. According to the
World Gold Council, more than half of India’s demand for the precious metal is for marriage
purposes.

It would be unwise to expect households to actively participate in any schemes that involve
‘melting’ the long-preserved jewellery. The past record of the gold deposit schemes that have so
far received lukewarm response is a proof for this. For instance, SBI’s gold scheme, though in
existence for several years, hasn’t taken off well as the bank has managed to mobilise only about
8 tonnes so far.

Similarly, it will be difficult to convince temple trusts to part with their gold treasures since the
gold lying in temple vaults are linked to faith and religion.

Also, like in the case of Thiruvananthapuram Padmanabhaswamy temple, the treasure in temple
vaults has tremendous antique value. Melting this in return for a certificate is unlikely to be a
welcome idea to the temple managers. However, for those who possess gold for just investment
purpose, the scheme offers an opportunity to get some return.

Channel for black money

Another major challenge for the government will be to check the possible flow of black money
into the financial system through this scheme. Those, who have unaccounted wealth stored in the
form of gold ornaments and bars, will find this as an excellent opportunity to legitimise their ill-
gotten wealth. Also, they can split the gold into tiny instalments and approach banks either by
themselves or a benami to escape filters.
Since gold is typically bought in cash in India and there is no documentation required for the
purchase, it will be difficult to verify the ownership of the gold deposited under the GMS. There
is also a possibility that such transactions might come under the scanner of taxmen.

But, the important point here for the investors is that probably for the first time gold is emerging
as an interest-yielding asset that can yield attractive return on investment. Those with unused
gold, and want to use this for investment, the 2.25-2.5 rate of interest is an attractive bet to get
some return on their yellow metal.

he Gold Monetisation Schemes (GMS), which were recently launched to access currently idle
gold held in the form of jewellery and ornaments by the public in India, and use this for more
productive purposes within the economy, have high chances of succeeding, says a report by
financial services provider UBS Securities India Pvt. Ltd, a part of UBS AG.

On 5 November, three schemes were launched to monetise gold holdings in the country and
reduce India’s import bill—national gold coin, gold monetisation scheme and the sovereign gold
bond scheme.

The GMS hope is to meet Indian investors’ desire for exposure to the price of gold but alleviate
the need to hold physical gold or improve the productivity of the gold held, said the report titled
Macro-Strategy Key Issue: India’s gold schemes–will they succeed? The findings are based on a
survey of 1,452 respondents whose family own gold, and who are decision makers for gold
purchase.

Need for such schemes

Incremental gold demand in India is largely met by imports, with net imports worth 1.7% of
gross domestic product (GDP) in financial year (FY) 2015, contributing significantly to the
current account deficit of 1.4% of GDP. Around 700-900 tonnes of gold is imported every year
by India and it accounts for a significant portion of physical demand.

Indians purchase gold either for consumption (used in its own right, in the form of jewellery) or
as a capital good (in the hope it may be used in the future to, which indirectly funds
consumption). Investors hold gold for a variety of reasons: as a store of value, a hedge against
inflation and currency fluctuations, as an insurance against uncertainty and tail risks. Capital
controls have also arguably played a role here.

These reasons are relevant to gold holders in India. While the rupee has depreciated by 47%
against the US dollar over the past five years, gold in rupee terms is up by 28%. Consistent with
this, there is a positive correlation between consumer price index (CPI) inflation and gold
purchases.

The GMS are linked to the Gold Metal Loan (GML) Scheme, which would allow metal collected
under the GMS to be lent out to the jewellery industry.
Click here for enlarge

Awareness not low

While a majority of the surveyed respondents were not aware of the GMS, the proportion that
was aware (20%) is not insignificant.

The top reason cited by surveyed respondents for past gold and/or gold jewellery purchase was
the occasion of marriage, followed by gold purchased for/during the festive season. Many
purchased gold as a form of savings (i.e., as store of value) too. A smaller proportion purchased it
as an investment to make returns. Comparatively, more households in the western and southern
parts of India had purchased gold to make returns than those in the northern and eastern parts.
Indeed, gold is a preferred method of savings and investment, next only to deposits in bank
accounts.

Also, respondents indicated willingness to participate in the scheme. Nearly 50% of respondents
said they are ‘likely’ or ‘highly likely’ to deposit gold or gold jewellery under such a scheme.
The overall responses were similar for both scenarios, i.e., getting the deposit and the interest
back in the form of gold or in cash. Respondents who owned both gold and gold jewellery were
most willing to deposit these under this scheme.

Apart from households, places of worship in India also currently hold a large amount of gold and
gold jewellery, as devotees make such offerings. Overall, many respondents ‘somewhat agree’ or
‘completely agree’ that the gold stored in India’s places of worship should be utilised and
deposited under GMS.

India’s deep-rooted connection with gold suggests that a fundamental shift in mentality and
attitudes is needed and this could take generations to play out. Much of the gold stock is in the
form of jewellery and ornaments, which in many cases will likely have some sentimental value.
Banks and the government may find it difficult to determine the right incentive to encourage the
public to part with these gold holdings.

Another potential deterrent is the widespread ‘under-carating’ in India, i.e., jewellery and other
gold retail products are less pure than what they should be. Depositing these gold items, and
thereby getting them refined, would mean that depositors are effectively crystallising these losses
in the purity of their gold holdings.

Finally, there have been some concerns that the wider public might be against the possibility of
places of worship depositing gold under the scheme.

However, since a significantly large proportion of respondents (nearly 50%) said they were likely
or highly likely to deposit gold under the scheme, combined with the government’s strong push
for the announced gold schemes, there’s a reasonable probability that they would perform better
than previous initiatives and also versus consensus expectations. However, the threshold is low
and there are challenges to immediate rollout. Therefore, limited near-term, impact is expected,
especially on global gold markets. Nevertheless, the prospects of the schemes to perform
considerably better in the long run and potentially impact the gold market can no longer be ruled
out.

Edited excerpts from UBS India Securities report Macro-Strategy Key Issue India’s gold
schemes–will they succeed?

Livemint

Topics: gold monetisation schemessovereign gold bondNarendra Modigold coin

First Published: Mon, Nov 09 2015. 07 18 PM IST

Latest News

Pradhan Mantri Gold Monetization and Bond Scheme

A nation of households obsessed with gold, the success of the all new Gold Monetization
Scheme (GMS) proposed by the Central Government is questionable. The proposed GMS is
going to hit some bedrock if not tackled properly. Experts have critically analyzed the scheme
from every aspect and sadly, there are too many hindrances that we will briefly discuss. But
before we do so, let us try and understand the proposed scheme and answer the question – ‘why
was this scheme proposed in the first place?’

The Gold Monetization Scheme – What, How and Why

The ‘What’ of GMS

Gold Monetization Scheme proposes the following:

 Mobilization of gold help by Indian institutions and households.

 Making the preserved gold to jewelers and banking institutions.

 Reduction of India’s gold imports through mobilization of existing gold.

  Improvement of market liquidity.

 Converting the gold of the customers into a secure performing asset.

Simply put, government wants Indian institutions and households that stash gold to give away
the gold to government against an interest earning. This gold will then be taken by government
and circulated in economy to reduce gold import burdens. So, the gold becomes an investment
vehicle for those who hold it at home or at institutions.

The ‘How’ of GMS

The question is, ‘how does the government intend to achieve this?’ For the proposed scheme to
work, a draft plan has been chalked out which are broken down into following components:

 Gold owner (can be households or institutions) need to approach a bank and open a Gold
Savings Account.

 They need to hand over the gold (usually in form of jewelry and coins) to Assaying centers.

 These centers will then assess the purity and provide a receipt to the owners.

 These Assaying centers will then inform the banks about the gold value that needs to be credited
to the Gold Savings Accounts of the customers.

 At this point, the banks will send the collected gold to refineries where the jewelry will be
melted and stored in form of bricks.

 The refineries will then be responsible for sending the gold bricks to jewelers whenever
instructed by banks. The banks will not really sell the gold to the jewelers. They will simply loan
out the metal to the jewelers who will later need to repay the bank with interest.

 Since the Gold Savings Accounts act as investment accounts for original owners of gold, there
will be a maturity period. Once the period is over, bank will return the gold to the owner along
with interest. The interest will be in kind and not cash. This means that the interest will also be
paid out in gold.

The ‘Why’ of GMS

Why has government proposed Gold Monetization Scheme in first place? Good question! Here
are the answers:

 Indian households and institutions hold nearly 20,000 tons of gold.

 The total value of this gold reserve is $1 trillion (US Dollars).

 $1 trillion makes up more than 50% of the nation’s GDP (Gross Domestic Product).
  Mobilizing and monetizing even a small percentage of this mostly-unused gold reserve will
significantly reduce India’s gold import requirements. When this happens, more money will be
available in market to boost up Indian economy.

 The increased liquidity can be diverted towards other causes like healthcare, education,
agriculture, transport infrastructure development, repayment of international debt etc.

What are the benefits of GMS for end users?

For depositors, Gold Monetization Scheme intends to provide two benefits:

 As low as 30 grams of gold can be deposited.

 There will be no income tax, wealth tax or capital gains tax levied on the Gold Deposit Accounts.

 Interest Rate on GMS would be 2.25% to 2.5%.

 There is no maximum limit

How do the banks intend to utilize the accumulated gold?

There are several ways in which the bank can utilize the gold reserves:

 Lending to Jewelers: Banks can lend the metal to jewelers and earn interest on that lending.
Additionally, lending the gold to jewelers will help reduce the total gold import. As import bills
are dragged down, the Current Account Deficit (CAD) of government will be reduced. CAD occurs
when total value of imported services and good is greater than total value of exported services
and goods. CAD means that the country is using international financial aid to operate. This is a
liability and eventually needs repayment. So, excessive CAD is bad and reducing CAD is good for
economy.

 Invite Foreign Currency Inflow: Banks can actually sell the gold reserves to other countries and
invite Foreign Currency in country, not in form of a debt but in form of earnings. A steady reserve
of foreign exchanges will help to stabilize Indian currency value and hence, make it stronger
against other currencies of the world.

 Use Gold to Meet CRR and SLR Requirements: CRR or Cash Reserve Ratio and SLR or Statutory
Liquid Ratio are two basic requirements that banks need to fulfill in order to stay operational.
These are actually cash reserves that banks need to maintain with RBI to deal with sudden
liquidity mismatch and prevent bankruptcy. It has been proposed that banks be allowed to
maintain CRR and SLR using the mobilized gold. This will allow banks to circulate more money in
economy, which will provide the much needed impetus for economic growth.

What are the problems with Gold Monetization Scheme?

Here are some of the problems as pointed out by experts:

  The affinity for gold among Indians is not because of the monetary value it holds. It is purely
cultural and emotional. Indians will be reluctant to see their valued gold melted and lent or sold.
Particularly in South India, gold jewelries are heirlooms. This is going to be a major trouble.

 A person depositing the gold possessed as heirloom will not have proper documents to prove
that the gold belong to him or her. This is where black money and white money comes into play.
Some may produce legitimately owned gold. Others may present illegally acquired gold. There
will be no way to tell the difference in absence of proper document. Thus, government will
actually open up a way for frauds to convert their black wealth into white money.

 Banks intend to pay interest to depositors in gold and earn interest from jewelers/borrowers in
cash. Earning in cash and paying in gold creates the risk of significant mismatch that may
eventually lead to catastrophic results.

 International Basel norms may not permit the banks to make CRR and SLR deposits in gold and
RBI isn’t much comfortable with the idea of gold deposits for CRR. This is because CRR is meant
for dealing with liquidity mismatch and using gold as CRR will lead to extreme volatility because
of gold prices changing continuously. There may be instances when drop in gold prices may lead
to drop in CRR. The minimum CRR requirement is 4% and RBI is not very keen on risking this.

The aforementioned problems are quite serious and government needs to address them properly
before rolling out the Gold Monetization Scheme on a grand scale. A similar scheme already
existed before the GMS was proposed during Union Budget 2015-2016 with the only difference
being the minimum deposit requirement that was set at 500 grams.