Gold deposit certificates to monetise idle asset on cards

Written by Sunny Verma | Banikinkar Pattanayak | New Delhi | Updated: Sep 26 2012, 08:37am hrs
The government is finalising a scheme to monetise physical gold holdings with individuals, firms and entities like temple trusts, with a view to putting these idle stocks into more productive use.

The scheme, which is being finalised in consultation with the Reserve Bank Of India, will allow banks to issue fixed tenor long-term gold deposit certificates. Banks could then hedge the risk of such gold liabilities in the futures market and use them for financing projects. The certificates will generate interest income for the holders and will be transferable. Banks will be free to decide on interest they offer on these assets, which could be 1-2% of the value of gold. The gains arising from these deposits will be tax-exempt.

At todays price, gold reserves with Indian households the worlds largest hoarders of the precious metal are valued at $1.06 trillion. Corporates and other entities also hold large quantities of gold. India is the worlds largest importer of gold, with domestic production accounting for barely 5% of total demand.

While banks will be free to customise gold deposit schemes, the government will define the overall framework within which these products will operate, said a banker familiar with the matter. The government needs to lay guidelines on valuing depositors gold, purity parameters and redemption options, among others, he said.

Government sources said the scheme would be kept simple enough to encourage maximum subscription from even small towns. The government plans to popularise the gold deposit scheme through the network of public sector banks.

The need for making large stocks of an idle asset available for intermediation by the financial sector assumed renewed significance after a record $58 billion of the bullion imports in the last fiscal year through March. The surge in these imports pushed the current account deficit to 4.3% of GDP from 2.7% a year before and pressured the rupee. The current account comprises the balance of trade, net factor income such as interest and dividends and net transfer payments.

Investors flocked to gold considered a safe bet in times of high inflation last fiscal on rising uncertainties. The precious metal climbed for an 11th straight year in 2011, led by robust consumption in India and China, and soaring central-bank buying. The average gold price rallied 28% in 2011 to $1,571.52 per troy ounce, although domestic prices surged by 32% due to a weak rupee, making the precious metal among the most attractive investment tool.

Banks need to offer attractive interest rates to prompt households into investing in it in a big way. Alternatively, other investment instruments, including government bonds, need to be made more lucrative even for retail investors to reduce their reliance on gold. Otherwise, the main goal of reducing gold imports and controlling the CAD substantially may not be realised, said Anjani Sinha, managing director and chief executive officer of National Spot Exchange.

State Bank Of India (SBI) currently runs a gold deposit scheme, which has also channelised some gold deposits of temples towards financial sector lending. The SBI scheme offers limited redemption offers and is mainly in the nature of a metal lending scheme, while the government plans to keep in place a broad framework enabling banks to come out with gold deposits as well as bonds, the sources said.

However, industry executives said SBIs scheme has not been very popular due to the low interest rate of up to 1% a year. Also, the minimum amount of gold deposit is pegged at 500g, which is quite high for a retail investor to participate.