gold monetization-scheme

GOLD MONETIZATION SCHEME


Finance Minister, Arun Jaitley during his budget speech stated, “India is

one of the largest consumers of gold in the world and imports as much as

800-1000 tonnes of gold each year. Though stocks of gold in India are

estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor

monetized”.

In order to bring into circulation a part of the 20,000 tonnes of gold held

by households and institutions, the Finance Minister introduced the Gold

Monetization Scheme that will enable investors to deploy their gold and

earn interest.

Also, this will increase recycling

of domestically held gold and

reduce jewellers’ reliance on

imported gold.



High gold import was one of the reasons for high current account deficit in

recent years, which resulted in a crisis-like situation in the second half of

2013. Imports came down due to restrictions in the form of high import

duties and fall in international gold prices.

Since India imports large amounts of gold, which are to be paid in foreign

exchange, the government devised to recycle the gold stock available in the

country in order to save foreign currency, which will also reduce vulnerability

in the external account.

What is Gold Monetisation Scheme (GMS)?

Gold Monetisation Scheme allows depositors of gold to earn interest on their metal accounts with banks. Once the gold is deposited in metal account, it will start earning interest.


The interest earned on it will

be exempt from income tax

as well as capital gains tax.

Let us see the formula of the Current Account Balance (CAB)

CAB = X - M + NI + NCTX = Exports of goods and servicesM = Imports of goods and servicesNI = Net income abroad [Salaries paid or received,

credit / debit of income from

FII & FDI etc. ]

NCT = Net current transfers [Workers' Remittances

(unilateral), Donations,

Aids & Grants, Official,

Assistance and Pensions etc]

CURRENT ACCOUNT DEFICIT

What are its objectives?



The scheme has three basic objectives:

To mobilize gold held by households and institutions in the

country.

Make gold available on loan from banks to jewellery businesses.

To reduce dependence on imports.

How it generally works?



When a customer brings in gold (jewellery) to the bank, it will first be tested

for purity and after the consent of the customer, it will be melted.

A certificate by the collection centre will be given stating the amount and

purity of gold which will have to be produced in the bank for opening the gold

savings account. The quantity of gold will be credited into the customer's

account.


Also, 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.

What is the tenure?


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

with breaking of lock-in period facility similar to your fixed deposit

accounts.

The minimum quantity of deposits is pegged at 30 grams 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 deposit.

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.

How will the banks get

incentivized?


Banks will be allowed to deposit the mobilised gold as part of their Cash

Reserve Ratio (CRR) with the Reserve Bank of India (RBI). CRR is the amount

of funds that commercial banks need to keep with the RBI.

Banks can also sell the gold to generate foreign currency. The currency

further can be used for lending to exporters and importers.

Banks can also convert the gold into coins which can be further sold to their

customers.

What Jewellers need to

know?


Jewellers can open a Gold Loan Account with the bank.

The jewellers will receive physical delivery of gold from the refiners once

their gold loan is sanctioned.

The interest rate charged to the jewelers will be based on factors like

interest rate paid to the gold depositors, fee paid to the refiners & Purity

Verification Centres and profit margin of the banks.

Let us see the formula of the Current Account Balance (CAB)

CAB = X - M + NI + NCTX = Exports of goods and servicesM = Imports of goods and servicesNI = Net income abroad [Salaries paid or received,

credit / debit of income from

FII & FDI etc. ]

NCT = Net current transfers [Workers' Remittances

(unilateral), Donations,

Aids & Grants, Official,

Assistance and Pensions etc]

CURRENT ACCOUNT DEFICIT

Hope you have understood the

concept of ‘Gold Monetization

Scheme’.


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your feedback at

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DISCLAIMER

The views expressed in this lesson are for information purposes only and do not construe to be

any investment, legal or taxation advice. The lesson is a conceptual representation and may not

include several nuances that are associated and vital. The purpose of this lesson is to clarify the

basics of the concept so that readers at large can relate and thereby take more interest in the

product / concept. In a nutshell, Professor Simply Simple lessons should be seen from the

perspective of it being a primer on financial concepts. The contents are topical in nature and

held true at the time of creation of the lesson. This is not indicative of future market trends, nor

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consequences of such action.

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