The government will likely fix a floor interest rate on gold deposits at 2% under its proposed gold monetisation scheme and leave it to individual banks to decide on the exact rate to entice households, temples and trusts, according to official sources.

The floor interest rate, if implemented, under the monetisation scheme would be the same as on a sovereign gold bond, a draft outline of which was released last week for further discussion.

With a final interest rate of 2-3%, tax-free interest on gold deposits and minimum deposit amount of only 30 grams per individual, the monetisation scheme could be a success, said analysts. This will be unlike a similar scheme launched in 1999, which flopped badly as the minimum deposits for an individual was as high as 500 grams and the interest rate was a meagre 1%, or even less.

“Returns have to be a higher proposition for depositors to come forward,” said Manoranjan Sharma, chief economist at Canara Bank.

According to the draft monetisation scheme, the interest would be valued in gold, and the customer would have the option of redemption either in cash or in gold, which needs to be exercised at the time of making the deposit.

RBI against giving CRR status to gold

The final guidelines of the scheme is likely to be issued in a week or two after the finance ministry and the Reserve Bank of India resolve the issue of whether to allow banks to deposit gold as part of their cash reserve ratio (CRR) requirement.

The RBI is not in favour of allowing gold deposits against the CRR requirements, fearing that such a move could weaken the CRR as a monetary policy tool due to inherent price fluctuations associated with the precious metal and that banks could hoard excess gold, the sources said. However, the government might impress upon the central bank to give the CRR status to gold as otherwise the scheme might not be an attractive proposition for banks, the sources said.

“Giving the CRR treatment to gold held under the scheme is important from the perspective of the banks, which would be incurring additional transaction costs because of handling, storing, valuation, transportation and security,” Sharma said.

The draft guidelines, released in May, had said banks could utilise the gold held in deposits for lending to jewellers and also pledge more gold and less cash with the RBI against their statutory liquidity ratio (SLR) requirements or CRR. Consequently, they could use the extra cash with them to lend at attractive interest rates, although the draft had made it clear the proposal on the CRR was still under examination.

MMTC-PAMP managing director Rajesh Khosla, who had been involved in discussions with policymakers on this issue, recently said if customers get 3% interest, the bank can give gold loans to jewellers at 6%, factoring in handling and refining charges of 1.5%. Currently, established jewellers get gold loans at 3.5-4.5%, though many smaller players get them at 5.5-6% or even higher.
No probe on gold deposit source
up to a limit

The final draft is likely to retain the criterion that an individual can deposit even in tiny amounts of 30 grams, either in bullion or in jewellery form. This threshold would be retained in the final guidelines, sources said. Also, individuals depositing gold up to a certain limit could be spared from probing questions on the source of the precious metal and would be required to provide basic minimum information required under the know your customer norms.

From safe to vault
* Floor interest rate, if implemented, would be the same as on a sovereign gold bond
* Final guidelines likely to be issued in a week or two after the resolution on the CRR status to gold issue
* RBI is against allowing gold deposits against the CRR requirements, fearing it could weaken it as a monetary policy tool