The draft for the gold monetisation scheme (GMS) is a significant step towards mobilising India’s gold. It can provide a fillip to the gems and jewellery sector by making gold available as loans from the banks.We believe that the draft GMS guidelines as proposed by the Indian Finance Ministry address several gaps in earlier schemes. Below response highlights some key components that will further strengthen GMS.
In our view, the overarching policy should address these issues:
- Trust: It is vital that consumers, banks and jewellers have trust in the quality of gold flowing around the monestisation ecosystem.
- Ease of use: Transactions must be easy. If they are not, it is unlikely savers will deposit their gold.
- Incentives: each market participant – from the depositor to the bank to the refiner – must be incentivised to use and develop the scheme. We believe that in the initial stages, till the depositor gets comfortable with the entire process, and the bankers, it may be useful to look at significantly higher level of incentives from the government.
- Scalability: It should lead to build up of adequate infrastructure over the medium term that is self sustaining and scalable.
At the outset, the policy can be termed complete only when the guidelines from the RBI are made known, else, there is a risk of market perceptions building up based on an incomplete scenario, Therefore, it might be useful to consider the final scheme as one proposal along with the regulatory guidelines including standard documentation and document control in all centres, With this in mind, we believe the policy should take into account the following.
1.Purity verification and deposit of gold
Ensure market penetration by building a big distribution network. This can be done by leveraging bank and NBFC branches. The draft guidelines envisage using the 350 hallmarking centers as a starting point for customers to deposit gold. This may be inadequate to address the potential demand. We would recommend that bank and NBFC branches be allowed to accept gold deposits directly.
Already, over 2,000 bank branches in India accept gold as collateral for loans. They do have a process even if rudimentary, for testing for the jewellery purity, which should be upgraded on the lines suggested by the scheme. Further, the trust and comfort level of depositors would be higher and will lead to greater acceptance of GMS. Such a setup with enhance convenience as the depositor will not have to first go to a purity testing centre and then to a branch. Also, the needto market these centres (to increase awareness) will be lower thereby reducing cost of distribution.
Make the depositing process more convenient and quicker:The technology exists that can test gold purity in under 30 minutes. This is far quicker than the suggested process laid out in the draft proposal that requires customers to wait for 5 hours across two stages. This technology is already in use in Turkey and determines purity of gold within +/- 0.5% of actual caratage.
Build trust through global standards and accreditation: It is vital that customers, banks and jewellers have trust in the gold flowing around the monetisation ecosystem. India should look towards trusted international standards or alternately develop a robust domestic standard, which is at par with international standards (e.g. LBMA). This will become even more important as India becomes an exporter of gold into the international market. The Bureau of Indian Standards should be mandated to introduce these standards and make it consistent with global standards so the gold moving through the Indian banking system is not of different standards, one international and another local.
Clarify norms around caratage: The gold ownership in India spans multiple caratage (24, 22 and 18 being predominant). The technology used in purity testing centres should be able to handle all types of caratage. Moreover, norms should be made clear regarding the conversion of these caratage to 24 or 22 carats (which can be made as the standard for redemption irrespective of deposit caratage).This is part of operating procedures as the scheme settles down.
2. Opening of gold savings accounts with banks
Reduce the minimum deposit:A significant share of gold that is stocked in India is with middle to lower income households. It is important to attract this segment to the GMS by reducing the minimum grammage to 10 grams, or in consultation with banks, with no minimum grammage prescription, leaving it to the banks to decide on the lower end, perhaps with flexibility to fix a longer deposit period for lower than 10 grams. This will promote competitiveness. Technology already exists (in use in Turkey) that can manage these deposits in a cost effective manner. The scheme will also have the added benefit of including these people in the financial system.
Making the scheme flexible will enhance its value proposition: The draft guidelines are silent on several aspects on account usage. These include opening multiple accounts, depositors’ ability to partially withdraw, add to the deposit and transfer deposit to another account / person. Customers should be allowed to open zero balance gold deposit accounts, and grammage limits should be set for any incremental deposits. This will enable the use of these accounts as an ongoing platform for gold savings. Such features will make them more attractive to customers. Clearly, these are part of the regulatory guidelines that is best addressed in one piece so the piloting of the scheme is smooth.
The account opening process should be simple, especially for small deposits. The draft guidelines are silent on documentation and disclosures required to open a deposit account with banks. While GMS should not become a tool to hide unaccounted wealth, we believe that disclosures on ownership should be waived for low deposit amounts (which can be aggregated at an individual level to discourage splitting accounts). This cut-off can be kept at 500 grams. Know your customer norms for gold accounts should be clarified and be consistent with that of opening of rupee deposits or similar to gold lending. Organised lending against gold jewellery has grown phenomenally without tax concerns (on gold placed as collateral) and the experience should be replicated in GMS.
Large deposits:It would be needed to clarify if ETF’s and other private wealth funds will be allowed to deposit in GMS to earn interest.
Offer higher flexibility on redemption modes: The need to declare redemption mechanism (gold or cash equivalent) at the time of opening the account is too restrictive. Allowing customers to give banks one month’s notice may meet customers’ preference for liquidity without imposing additional burden on the bank. A shorter notice period would be even better.
Customers should be given a multiple options for redemption of gold such as withdrawal of cash through ATM’s, transfer to savings account, transfer to another gold account, redemption in gold (Ashok Chakra coins) or rollover of deposit for another term.
Redemption of fractional quantities: This needs to be dealt with; perhaps standard coins of 1 gram should be the basis of settlement.
Allow for loans against gold deposit account: Individuals should be allowed to obtain loans against their gold deposits similar to loans against rupee deposits. These loans will increase liquidity of the gold deposit accounts and mitigate the need for the customer to break the deposit under emergency scenarios. This can create a healthy shift of unused gold jewellery from being used as collateral into monetised gold under GMS.
Interest rates and pricing: The draft guidelines suggest that banks be allowed to pay interest on gold accumulated 30 to 60 days after deposit. We would recommend that the interest accumulation to the customer starts immediately on account opening. The cost of work in progress inventory to be factored into the interest rate offered. Such a model would be easier to communicate to customers and will encourage banks to reduce the timeline from customer deposit to use in monetisation through superior operations (we believe this can be as low as 5 days).
The interest rates could be on par with FCNR deposits (Foreign Currency Nonresident Deposits) that ranges from 1.5% to 2.5%.
Tax exemption should be extended: The draft guidelines mention that the customers will receive exemption from Capital Gains Tax, Wealth tax and Income Tax in line with the 1999 scheme after due examination. This must be unequivocal at the outset.We strongly support extending these benefits and would suggest the same be extended to pre-deposit and post-deposit capital gains.
3.Utilisation of deposited gold
The scheme should carry incentives to make it attractive for both bankers and depositors. The economics of a gold deposit cannot work purely on market dynamics.
Banks must be incentivised to develop GMS products: Given the highly liquid nature of gold as an asset, well established norms of international standards and highly efficient market led pricing, use of these deposits against CRR requirements subject to prudential limits, will enhance viability of GMS without increasing any risk into the system. Further, use of gold as a collateral with RBI and availing a discount on the repo rate (~75-100 bps) can be considered.
Duty exemption: Given the quantum of demand each year in India ( ~ 900 tonnes of gold), a strong incentive would be to allow banks to import gold free of duty up to a certain quantum, that is determined by the amount of gold collected under GMS.
Loan against gold to be set-off against the ‘Priority Sector’ lending targets: Priority Sector lending benefit should be given to banks for the gold lent to jewellers (against the gold collected under GMS). This will encourage banks to accept gold deposits on a large scale and step up the pace of growth of gold loans, which will in turn drive their profitability.
Create framework for interbank transaction of gold certificates: This is required to build a liquid gold deposit market and will also help manage small deposits. As the gold flows from the customer to the melting centre to the refinery and to the RBI, not all banks will have the minimum quantity of gold to ensure the 3-5 days turnaround time in the gold clearing process. Interbank transactions will allow banks to trade gold certificates based on the quantity that is lying at melting centres and refinery. This will also help meet redemption of gold in a seamless manner.
Allow for banks to hedge the gold collected under the scheme: The draft guidelines are silent on hedging mechanism. Some of the utilisation choices such as outright sale of gold coins will introduce price risk in the value chain. We recommend that banks be allowed to hedge the gold collected under this scheme.
4.Other enablers to ensure success
Link GMS to Pradhan Mantri Jan Dhan Yojana: By opening more than 115 million new bank accounts in a very short span Pradhan Mantri Jan Dhan Yojana has achievedgood success and increased thecoverage of banking to 99.74 per cent of all households in the country. By linking GMS to Jan Dhan Yojana the infrastructure and architecture can be utilised effectively for gold deposit mobilisation.
Women’s accounts – Women accounts can be offered an extra 0.5 to 1% interest rate on GMS. They can be offered loan at lower interest rate as an added incentive. In addition social welfare schemes using gold targeted at girl child for marriages can be through GMS accounts.
Concerted marketing efforts to create awareness and drive usage: At the launch of the scheme, there should be an industry level concerted marketing effort to promote GMS. Given low awareness of such a product and some natural disinclination towards use coming from tax and wealth related concerns, the scheme will fail if not backed by such a campaign. This marketing campaign can be a joint government and banking association effort on the lines of Jan-Dhan program. Any apprehensionor miscommunication may impact success of GMS.
Jewellers Participation: Further participation from jewellers should be defined as the scheme progresses (apart from just gold metal loan). They can play a role as collection agents.
Improve infrastructure through incentives and PPP model: Tax and other incentives should be rolled out to enable the improvement or creation of new infrastructure (international quality refineries, melting plants, assaying centers etc) across multiple locations in India. This will reduce the need for transportation to bank branches, refineries and the government mint. It will improve cost efficiency. Eight to ten international accredited refineries and over 300 melting / fabrication centres will be needed. Such setups can be constructed with a public-private partnership model to ensure high degree of private participation.