India, presently inhabiting a huge amount of current account deficit (CAD) in their balance of payment account due to high imports, has finally found a way to diminish it by lowering their gold import bill. Government of India has launched a new scheme called ‘Gold Monetization Scheme’. Under this scheme Indian people have the right to monetize their gold in the bank and earn interest on it. According to a report, Indian households have a stock of 20,000 tons of gold lying with them.
The purpose of this scheme is to bring domestically held yellow metal into circulation by encouraging individuals to deposit their stock of gold in melted form in the banks and earn interest on it.This scheme would facilitate an investor having a minimum investment of 30 grams of gold with (beneficial for low income group) in their gold saving account, with minimum Tenure of 1 year.
The interest earned on the deposits is tax free. Even the capital gains that arise from trading or redemption of these deposits are exempt from tax.
When a customer brings gold to the certified purity testing center or bank, the center will determine the exact purity and quantity of gold and the determined quantity will be credited to the customer gold savings account. Customer will be asked to complete KYC (know-your-customer) process. The deposited gold will be lent to jewelers by banks at a slightly higher rate. This interest rate difference would be profit for the banks.
The procedure under the scheme is as follows:
- Individual will be required to visit the purity testing Center to test the quality of pure gold. After that a customer is needed to fill a bank form and give his consent of melting.
- The impurities will be removed from the gold to get the net weight of jewelry (gold only). It is then melted. If customer is not happy with the process, then he can ask for his melted gold back but he has to pay a fee to the Center.
- Fee includes the testing charge which may amount up to Rs.300 and melting charges Rs.500 up to 100gms of jewelry. (melting charges will vary according to different size of jewelry).
- Agreed customers have no need to pay the fee as bank will pay the fee on their behalf. The collection center will issue a certificate stating the amount and purity of gold to customers.
- Based on the certificate, the bank will open the gold saving account and this account will be credited with the amount mentioned in the certificate.
- The minimum tenure of the certificate is 1 year and can be rolled over with the multiples of one year.
- Interest rate will be 2.5% to2.5%(depending on tenure) fixed on quantity invested.
- Let’s say you invested 100gms of melted gold in your gold saving account, after 1 year with 2% of interest the value of gold in your account will be 102gms. Now you have the choice to redeem this value in cash or gold only.
For Example:
Notes:
- Investment amt. At end of year= closing quantity at end*Gold rate at end.
- Issue price per gram is Assumed price.
- Final Growth= Ending Investment/Opening Investment.
- Real Growth= Interest Earned on Quantity Invested.
- Inflation in gold prices= Closing Gold Rate/ Opening Invested Rate.
- Nominal Growth= ((1+inflation %)*( 1+Real%)-1).
Experts feel that initially government should focus on investment part of gold (only gold bars and coins) because many households especially women will not be in mood to invest their jewelry in melted form. As people become comfortable they can look for the consumption gold (jewelry) also.
This blog is written by Jatin Aggarwal, Sem III student of MBA (FA), ICoFP Delhi Campus