Gold Monetisation - all you need to know about

Worrying on gold lying idle at home? Welcome the Gold Monetization scheme!!

Troubled by the burgeoning gold import bill, the Finance Minister has announced the scheme in his Union Budget with an objective to mobilize gold held by households and use it for productive purposes and eventually reduce the gold import in the long term. The scheme is set to modify the existing Gold deposit and metal loan schemes.

The Reserve Bank of India has finally come up with the guidelines for the implementation of the scheme. It authorizes all Scheduled Commercial Banks to operate this scheme.

So, what does Gold monetization mean?

Putting it simply, under this scheme, people deposit gold into banks. Banks accept them just like regular bank deposits. Interest is accrued on the deposits and it can be withdrawn in rupees. On maturity, the deposit can be redeemed in either gold or its rupee equivalent.

Banks on the other hand, refine the gold into gold bars and either sell or lend them. Purchases or borrowers include the Government or jewelers.

Who can avail the scheme?

The scheme is open to resident Individuals, HUFs and Mutual Funds/Exchange Traded funds.

How much gold can we deposit?

As much as you have!! The scheme prescribes a minimum of 30 gms. Gold with 995 finesse. No bar on the maximum amount.

How long?

There are three maturity brackets notified.:

Bracket A:1-3 years.
Bracket B: 5-7 years.
Bracket C: 12-15 years.

There is a very important distinction to be noted. Deposits under bracket A are accepted by banks on their own account. Deposits under Bracket B & Bracket C are accepted by banks on behalf of the Government.  

What’s the big deal in the distinction?

The distinction, as noted earlier, is significant from both the investors’ and bankers’ perspectives.

From the common investor’s perspective, the essential difference lies in redemption of the deposit and interest on maturity.

i. For deposits under bracket A, maturity proceeds can either be in gold or its rupee equivalent, at the option of the depositor. The option is to be exercised at the inception of the deposit itself.

ii. For deposits under bracket B & C, maturity proceed shall only be in the rupee equivalent. No gold!!

From the bankers’ perspective, the difference lies in the utilization of the gold deposited.

i. Gold received under bracket A, is either sold off to Government, jewellers or other banks. It can either be lent to the Government or jewellers.

ii. Gold received under bracket B & C are auctioned and the proceeds are deposited into the Government’s account.

What’s the procedure of opening a gold deposit?

Various agencies will be involved in the process. They are yet to be notified. Essentially, a gold deposit under this scheme involves the following three parties:

a. The designated banks. (All scheduled commercial banks) – The primary players, accepting deposits both on their own account and on the Government’s behalf.

b. The Collection and Purity Testing Centres (CPTC) – Gold is actually taken to these centres for verification and certification of quantity and quality. Once they issue a receipt, bankers create a deposit.

c. Refiners – Deposited gold goes here. Each bank selects a refiner. Gold deposited in CPTCs are transferred to the refiners for handling and redemption. Bankers pay an agreed upon charge for the services.

So, an investor first approaches a CPTC, gets the gold verified for purity and quantity. CPTC issues a receipt for the deposit. The investor takes the receipt to the bank. Bank created a Gold Deposit. The gold is then transferred to a refiner or is stored with the bank itself for further handling.

How do banks manage the risk?

Banks are empowered to hedge their risk exposure by approaching the International Exchanges, London Bullion Market Association or Over- The – Counter arrangements.

Who will supervise the scheme?

The government shall set up a supervisory mechanism after consulting with all the stakeholders involved.

The scheme, as can be inferred, is yet to find its feet.  The effectiveness of the scheme in achieving the objectives remains to be seen. Much of the success of the scheme depends upon the mindset of Indians.  Let’s see how much of the estimated 20,000 tonnes of gold sitting in the safe lockers will be brought out and pumped into the system.