In a move that is likely to free up funds for the corporate sector, the government is planning to use deposits under its Gold Monetisation Scheme (GMS) to bring down its market borrowings and save on the interest cost.
It is also looking to continue with a revamped version of the Gold Deposit Scheme of 1999 and the Gold Metal Loan initiative of 1998 simultaneously, under which it will allow the banks to mobilise deposits to the extent of “0.25 per cent of the Cash Reserve Ratio (CRR)”, which is the portion of the total deposits that has to be kept with the RBI in cash.
Under the GMS, depositors will be allowed to deposit only gold coins and bars, and will receive interest at the annual rate of 2.5 per cent.
The “gold deposited will be auctioned by RBI or any other authorised agency at the earliest… the amount realised will be used in lieu of the government borrowing, and the notional interest saved on this amount would be credited in an account called Gold Reserve Fund”, an official source told The Indian Express.
The monetisation is aimed at mobilising the estimated 20,000 tonnes of idle gold held by households and various institutions while giving a boost to the gems and jewellery sector by making gold available as raw material on loan from the banks. In the last fiscal, the sector constituted 12 per cent of the country’s total exports while value of gold items alone was over $13 billion.
“The depositor will likely be paid interest at the rate of 2.5 per cent per annum by banks out of the gold reserve fund and the redemption of deposits would be in cash under the GMS. The draft Cabinet note has been prepared and circulated to the departments for the comments,” the official said.
According to Budget 2015-16, the government plans to borrow Rs 6 lakh crore in the current fiscal compared to Rs 5.92 lakh crore in last fiscal. However, the net borrowings will be Rs 4.56 lakh crore after considering repayments of past loans and interest.
The tenure of deposits under GMS will be of three or five years and no early redemption will be allowed. In the event of the gold price falling from the time the deposit was made, depositors will be given the value of gold they had originally deposited — they get the benefit in case the price rises.
“This will protect the depositor while the saving of interest cost on the market borrowing will partially meet the interest obligation as well as gold price risk. The deposits will not be hedged by the government,” the official added.
In its two-pronged strategy to monetise gold, the government will also provide another version of the Gold Deposit Scheme under which customers can bring in 30 grammes of gold each in any form.
After producing the certificate of gold deposited at the Collection and Purity centres, the savings accounts of customers will automatically get updated with respect to crediting the quantity of gold.
Initially, according to the proposal, the customer will be paid an interest of 1.5 per cent p.a. which can be changed by the finance ministry.
“Both principal and interest will be paid and valued in gold based on the rate of gold on that day. The tenure of deposit is minimum one year with a rollout in multiples of one year,” the official said.
“To incentivise banks, it is proposed that up to 0.25 per cent of the CRR will be allowed to be deposited as gold. Necessary amendments will be made in the regulations governing CRR,” the official added.
Currently, CRR is four per cent, and if the mobilised gold is considered for meeting that requirement, banks would have additional cash for lending purposes.
Apart from lending to jewellers and depositing as CRR, banks would be allowed to convert the yellow metal to India gold coins for sales. They will also be allowed to buy and sell on domestic commodity exchanges where mobilised gold can be delivered.