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Gold deposit scheme -- It’s different
The earlier Gold Bonds were a damp squib.Yashwant Sinha has always been innovative about gold. In 1990, it was Sinha who by swapping 40 tonnes of gold in a hush-hush operation, got India out of a tight ‘Balance of Payments’ situation. Then again, in the last budget he announced the ambitious Gold Deposit Scheme (GDS or gold bond) to utilise the 10,000-odd tonnes of idle gold in the country in the hands of individuals, temples and institutions. Setting itself apart from the previous gold bonds, Sinha stuck to his guns and refused to make this bond scheme yet another amnesty scheme. By doing so, he sent the right signals to the markets. It is the first `legal’ gold bond which will make a genuine effort to mobilise the vast amount of private gold in India.SBI became the first bank to kick off its deposit scheme last month. It began with a bang garnering 400 kgs of gold in the first few days itself from some high profile temple trusts in the process. But will this GDS be a success? Will it garner the targeted 100 tonnes of gold in the first year itself? The GDS is the first important step towards development of the gold trade market in India, bringing into play some form of gold banking in the country. As it will be necessary to set up assaying and hallmarking centres in the country it will ultimately get into place an infrastructure of checking the quality of gold on an ongoing basis. Even if that is the only achievement of the bond, it will be a big success. The differences
Earlier schemes encouraged individuals to import fresh gold and invest the same in bonds. So, the real purpose of tapping the hoarded gold was not achieved. With the interest rate between 3-4 per cent, it will not encourage people to shift their monies from savings bank account to gold.By keeping the NRIs out, RBI has prevented any arbitrage options, which could flood the markets with imported gold at the expense of dollar remittances. Moreover, banks are not geared to take too much of gold. Anything in excess of 200-300 tonnes per annum could prove to be counter-productive.The RBI needs to be complimented on keeping gold from GDS within the country and thus help keep the international price at a sensitive period.It is imperative to note that the aim is to utilise idle gold and not to lower its value.What is imperative for the success of the scheme is that banks market the scheme on the ground level by moving out into the field.The rate of interest charged for lending will depend on the exit route available to banks. The Reserve Bank of India (RBI) should put the minimum rate at 8-9 per cent at least. Even at 9 per cent banks may have to park their dollars outside, so as to reduce the exchange risk.The aim of the gold loan is not to increase stock on the shop floor but to remove the risk attached with gold and reduce the cost of holding an inventory by serving as an ancillary benefit.Finally, efforts should be put to educate the markets about the various hedging tools available. Gold loans should be used more as a hedging tool rather than a financial tool. Success of the scheme will ultimately depend on how soon the gold market is developed in the country. The $70 billion plus jewellery market beckons India. GDS: Highlights
Instrument: Banks issue passbook/statement of account or certificate/bond to depositors of gold. Transferable on endorsement and delivery.
Deposit: In the form of bars, jewellery, coins, etc., in scrap form only. Preliminary assaying by x-ray/karatmeter and thereafter by fire assay.
Assaying infrastructure to be jointly set up by designated banks/existing units.
Permission to allow banks to export gold, etc., for assaying and refining as well as re-import of refined gold.
Resident Indians (institutions, temples, trusts, HUFs and companies) allowed to deposit gold.
Certificate of deposit/passbook within 90 days of receipt.
Period of deposit: three to seven years. Initial lock-in period (SBI one year).
Interest rate offered to depositors between 3-4 per cent.
Delivery of gold on maturity in .995 fineness or rupee equivalent at the depositor’s option at the then prevalent rate of gold.
Rupee loan against collateral.
Open-ended scheme till further notice.
Exempt from IT, WT and capital gains tax.
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