GOLD MONETIZATION SCEHME IN INDIA

Submitted in partial fulfillment of the requirements

for the award of the degree of

TO

Dr. B. R. Ambedkar University, Delhi

Guide: Kajal Mittal (Assistant Prof.) Submitted by: Tushar Negi

Dr. B. R. Ambedkar University, Delhi

Batch (2022-2024)
 Certificate

I, Mr. /Ms Tushar Negi_, Roll No. __S223F0049_ certify that the Minor Project
Dissertation (BCOM-112) entitled “_THE SUCESS GOLD MONETIZATION
SCHEME IN INDIA” is done by me and it is an authentic work carried out by me. The
matter embodied in this project work has not been submitted earlier for the award of any
degree or diploma to the best of my knowledge and belief.

Signature of the Student

Date:

Certified that the Minor Project Report/Dissertation MBA entitled “THESUCESS

GOLD MONETIZATION SCEHME IN INDIA done by Mr./Ms. Tushar Negi, Roll
No. S223F0049, is completed under my guidance.

Signature of the Guide

Date:

Name of the Guide:

Designation:

Countersigned

Director / Project Coordinator

 Acknowledgement
I have taken efforts in this project. However, it would not have been possible without the
kind support and help of many individuals and organizations. I would like to extend my
sincere thanks to all of them.

I am highly indebted to Kajal Mittal ma’am for their guidance and constant supervision
as well as for providing necessary information regarding the project and also for their
support in completing the project. I would like to express my gratitude towards my
parents and members of Dr. B. R. Ambedkar University, Delhi for their kind cooperation
and encouragement which helped me in completion of this project, which also helped me
in doing a lot of research and I came to know about so many new things. I am really
thankful to them.

I would like to express my gratitude and thanks to my mentor and teachers for giving me
such attention and time.
My thanks and appreciation also go to my friends in developing the project and who have
willingly helped me to complete this project.
S No. TOPIC PAGE NO.
1 CHAPTER-1 Gold monetization scheme in India 1-16

i Introduction 1-5

ii Role of household gold in India 6-9

iii History of gold monetization in India 9-10

iv Idea behind gold monetization 10-15

v Eligibility of depositier of the scheme 16

2 CHAPTER-2 Data Presentation and analysis 18-40

i Features of gold monetization scheme 18-21

ii Objectives of gold monetization scheme 22

iii Operational aspects of gold monetization scheme 23-24

v Attractiveness of Gold monetization scheme 24-25

vi Benefits of the scheme 25-27

vii Economic vailibilty of banks 27-28

viii Reasons for low gold deposits 29-36

3 CHAPTER-3 Conclusion and Suggestions 37-40

i Performance of Gold Monetization scheme 38-40

4 References 41
 Chapter 1

Gold Monetization scheme in India (Introduction)

India: One of the largest consumers of gold since thousands of years, gold has been an
integral part of the Indian households. For many people, gold I is equally viewed as a
safe, protected investment; an exclusive way to preserve their wealth. Investors have
considered gold as one of the best sources of value due to its durability, easily movable
and universally acceptable, and therefore one of the safest avenues of investments in the
world. Additionally, gold is conventionally considered a good inflation hedge and during
times of inflation the price is likely to rise. Even with these benefits, gold has not been an
exceptional long-term investment and has suffered through many phases of
underperformance, which are generally followed by shorter periods of strong gains.
Nonetheless, gold may be a suitable holding as part of a diversified portfolio focused on
safety.

However, it is vital to think that gold does not provide any income and is therefore not
appropriate for investors interested in generating cash flows from their portfolios. The
preferences of people for gold in India are influenced by many factors such as social,
economic and cultural. In India, gold is regarded as a liquid asset and hence widely
recognized for intergenerational transfer of wealth as it is considered to be the most
efficient store of value. In the last few years, gold imports have also been rising
significantly. India accounts for more than a quarter of global gold imports despite being
the contributor of less than 2 percent in the global trade. India is the largest buyer and
consumer of gold in the world, accounting for approximately 26% in the year 2015.

Gold has a great advantage of liquidity, availability and universal acceptability along
with non-availability of other investment avenues, particularly in rural India, has made
gold a favorite investment avenue for Indian retail investors. Indian weddings generate
approximately 50% of annual gold demand. India is one of the largest consumers of gold
and nearly 95% of its annual gold demand is met through imports. This puts burden on
the country’s fiscal management. India imports 800-1,000 tons of gold every year. Out of
the total imports, around 350 tons of imported gold is in the form of coins and bars. India
imported gold worth US$40-50 billion annually between 2010 and 2013. Imports, in US
dollar terms, came down to US$34 billion in 2014 on the back of import restrictions, fall
in international gold prices. In the last eight years (2007-14), India imported gold worth
about US$270 billion

Gold Monetization Scheme (GMS) refers to a process wherein a depositor deposits gold
(say jewellery, coin, etc.) with a bank which is then lent by the bank to its borrowers (say
jewellery makers), after melting into gold bars. This is akin to a normal banking
operation (like a savings bank account), but carried out in terms of gold instead of in
rupee.
GMS allows the depositors of gold to earn tax free market determined interest income
(denominated in gold but recoverable either in gold or in rupee [mandatorily in rupee if it
is deposited for a medium or long term]) from the pure gold they deposit with banks in
their “Gold Savings Accounts” and permits the jewelers to obtain their raw material -gold
bars created from the melting of the gold deposited with the banks- as loans in their
“Metal account”.  In addition, Banks / other dealers would also be able to monetize their
gold. 

Gold can be submitted in any form (bullion, jewellery etc) but the amount deposited with
the bank is calculated on the basis of the pure gold content of that deposit (after removing
the weights of precious stones in jewellery etc.), which is verified through an accredited
assayer. Both principal and interest to be paid to the depositors of gold, will be ‘valued’
in gold. For example if a customer deposits 100 grams of gold and gets 1 per cent
interest, then, on maturity he has a credit of 101 grams. The customer will have the
option of redemption either in cash or in gold, which will have to be exercised in the
beginning itself (at the time of making the deposit).

Union Cabinet approved the Gold Monetization Scheme in September 2015 and Reserve
Bank of India (RBI) issued the detailed guidelines Reserve Bank of India (Gold
Monetization Scheme) for the implementation of the Scheme on 22 October 2015.
Certain modifications were made to the Scheme Guidelines on 21 January 2016.

Only Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange

Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can
make deposits under the scheme, either individually or jointly. While the minimum
deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and
other metals) equivalent to 30 grams of gold of 995 fineness, there is no maximum limit
for deposit under the scheme. All Scheduled Commercial Banks (excluding RRBs) can
accept these deposits.

Gold Monetization Scheme was launched on 5th November, 2015 and till December 10,
2016 a total of 5781 Kilograms of Gold has been mobilized under the Gold Monetization
Scheme including those raised from a few temples. It is not mandatory for temples to
deposit in the scheme.

The Gold Monetization Scheme is a great opportunity for big Indian households to make
profits from the old jewellery lying in bank lockers and at the bottom of safe deposit
boxes. Companies, trusts, jewelleries and individuals who have a hoard of gold can also
use this scheme to monetize their precious metal. But do not forget that your jewellery
will not come back to you in the same form as you put them in – you get the returns in
the form of money or gold coins and bars that you can later encash.

Role of household Gold in India

1. Customers: Prevalent Misconceptions There is lack of financial literacy as Gold

consumer’s survey revealed that, due to the absence of mass awareness campaign,
many people were not aware of the scheme though there were campaigns for
Sovereign Gold Bond and India Gold Coin. The Income Tax Act permits holding up
 to 500 grams of gold. Scheme leverages the idea of depositing gold than selling it.
Depositors are afraid of being questioned by tax authorities regarding the source of
funds that financed their gold purchases. Also, there are no records of inherited gold.
Hence stakeholders expect amnesty/ ‘no questions asked’ policy for deposits made
under the scheme. Nevertheless, 50 per cent gold demand is from rural areas where
tax repercussion fear is absent due to IT exemption on agricultural income. Though
the scheme does not currently target heirloom jewellery, majority exhibited
reservation regarding people’s willingness to part with gold due to emotional
attachment as large amount of gold in households is inherited.

2. Jewellers: Debatable Role Local jewellers use inaccurate and primitive techniques
and as per assertions by World Gold Council, 70 per cent of Indian hallmarked
jewellery is not hallmarked accurately.17 Therefore, purification and testing for the
scheme should be done by commercial banks themselves – via bank accredited testing
centers. Fire assaying method (6 hours process) and X-ray Fluorescence Spectrometer
method (45 min process) are the techniques used with a facility for the customer to
see the process. The jewellers are not part of the scheme as yet but are willing to
participate in the scheme, provided there is an assured and stable supply of gold in the
country. Jewellers claim that 30 per cent of the gold used in jewellery in the country
today is recycled gold and they are willing to act as Collection and Testing Centers
for the Scheme subject to accreditation by the government (A ‘P.C. Jewellers’ outlet
in Delhi is the first and only non-government collection center). The banks offer
different rates of interest to jewellers based on their risk profile and credibility. For
instance, large retail jewellery outlets enjoy a 2.0-2.5 per cent interest rate for gold on
lease, whereas small jewellers pay an interest rate of 5-6 per cent. Through GMS
however, when small and large jewellers will participate in the scheme alike, there
will be a uniform rate of interest which will be offered by banks, which will prove to
be expensive for large jewellers but economical for the small jewellers.

3. CPTCs and Banks Trust Deficit between CPTCs and Banks There is delay in
scheme’s full throttled function as banks have not yet signed up with CPTCs. In the
 interview, the following reasons emerged for the standoff between banks and CPTCs:
Banks feel that CPTCs are undercapitalized and hence pose a financial risk. They thus
seek a certain percentage of gold as guarantee from the CPTCs. But, involvement
with multiple banks for a CPTC makes this infeasible. There is a probability of a
discrepancy between gold content as measured by the CPTCs and refineries as the
assaying techniques at CPTCs cannot detect Platinum Group Metal (PGM) traces.
This issue is further compounded by the fact that India has only one LBMA certified
refinery (MMTC-PAMP).
Gold pricing structure across stores is not standardized and have variations with
respect to making charge, wastage, and overall pricing between different jewellers. In
the experiment conducted by us, the significant loss, besides the usual price
fluctuation, a deduction of 4.5 per cent as wastage was incurred during exchange of a
gold ring within a week of purchase, at the point of purchase itself showed how
consumer was at the jeweler’s mercy. These could be reasons why people don’t prefer
gold exchange for currency. Also, the cash is returned only after a few days and not
immediately.

4. CPTCs and Banks Trust Deficit between CPTCs and Banks There is delay in
scheme’s full throttled function as banks have not yet signed up with CPTCs. In the
interview, the following reasons emerged for the standoff between banks and CPTCs:
Banks feel that CPTCs are undercapitalized and hence pose a financial risk. They thus
seek a certain percentage of gold as guarantee from the CPTCs. But, involvement
with multiple banks for a CPTC makes this infeasible. There is a probability of a
discrepancy between gold content as measured by the CPTCs and refineries as the
assaying techniques at CPTCs cannot detect Platinum Group Metal (PGM) traces.
This issue is further compounded by the fact that India has only one LBMA certified
refinery (MMTC-PAMP).

Historical Background of Gold Monetization Schemes in India

Efforts to monetize gold stock in India is not a decade-old phenomenon. More than 50
years ago, in November 1962, 15-year gold bonds were allotted having an interest rate of
6.5% per annum. In March 1965, a new series of 1980 gold bonds were allotted at 7.0%,
whose interest rate was revised to 6.5% after seven months in October 1965. However,
unlike the previous two issue of bonds, the repayment of which were in rupees equivalent
of gold, these bonds were redeemed in gold of standard quality on maturity. The Central
government undertook gold auctions in 1978-79 to curb smuggling and contain local
prices (proceeds from the auctions were meant for bridging the fiscal deficit gap) after
more than a decade. The gold auctions were, however, not continued because of
denunciation. Afterwards there were a lot of developments such as review of the gold
policy in1986 and the Reserve Bank of India (RBI) suggesting the setting up of an
institutional mechanism called „Gold Management Corporation‟ (GMC) to mobilize gold
in 1992, and Gold Bond Scheme (GBS) 1993 was launched for a period of three months
between March to June 1993. With a minimum offering of 500gms, subscribers could
buy five-year gold bonds carrying a fixed lump sum interest payable on maturity.
However, the RBI offered to buy back those bonds after three years at lower than market
prices.

This scheme replaced gold bonds in 1999. Banks were allowed to float the scheme after
the RBI‟s approval, but banks did not show much of the interest. State Bank of India
(SBI) launched the scheme in November 1999, discontinued it later and then introduced it
a gain in 2009. The decision of rate of interest was left to the banks discretion. SBI paid
1.0% for three-year gold deposit; 1.25% for four-year gold deposit and 1.50% for five-
year gold deposit in 2009, which were changed to 0.75% for three years, and 1.0% for
four-five years in 2010. In the early2013, RBI relaxed the norm, but it still could not take
off. In all, GDS failed to achieve the desired objective of monetizing gold stock in India
and reduce imports of the yellow metal.

Idea behind the scheme

The basic idea behind the scheme is to mobilize the gold lying idle and put it to
productive use. India is one of the largest consumers of gold in the world; however, it has
to rely on imports to meet around 80 per cent of its demand for gold. Gold accounts for a
preponderant share in the country’s trade balance. Gold imports contributed to nearly 30
per cent of trade deficit during 2009-10 to 2011-12. In this context, an idea that has
gained currency is to monetize the gold which is lying idle with the households and other
entities within India and make it available for re-use.

In the Union Budget (2015-16) speech, the government had announced to replace the
existing Gold Deposit Scheme (GDS) (1999) and Gold Metal Loan (GML) Scheme
(1998). But as GMS is a combination of the best features of both the schemes, RBI in a
notification later clarified that GMS would include revamped GDS as well as GML. In
the guidelines, the central bank has further clarified that the GMS will replace the
existing GDS (1999) but the deposits outstanding under GDS will continue to run until
maturity unless prematurely withdrawn by the depositors. Another important point
mentioned in the notification is that the existing GML scheme will continue to run
parallel to the GMS linked GML or effective mitigation of risks relating to the
operationalization of the policy.

Finally, an econometric analysis of gold consumption and its potential determinants was
conducted using household data from all 640 districts of the National Sample Survey for
2011-12. The analysis shows that propensity to consume gold is positively correlated
with proportion of females in the household and with number of daughters in the
household. Also, ceteris paribus, rural households have a higher propensity to consume
gold, and Hindu households have a higher propensity to consume gold. Clearly,
increasing the effectiveness of the Gold Monetization Policy depends on a deeper
understanding of consumers’ interactions with and sentiments towards gold. The
effectiveness of the policy also depends on recognizing the challenges faced and
incentives required by banks, refiners and other stakeholders in implementing this policy.
This research is an attempt at developing such an understanding.

India is the second largest consumer of gold in the world as per 2015 demand trend
estimates from World Gold Council (WGC) (World Gold Council, 2016b). Reports
indicate that the unconfirmed public stock of gold in India is close to 25,000 tones
(Bhayani, 2016). This is approximately 15% of all the gold that has been mined till date
worldwide (World Gold Council, 2016a). Compared to other countries, while the
household gold holding is high, the country’s central bank, the Reserve Bank of India
(RBI), holds approximately only 500 tons of gold as reserves. Even though the price of
gold has shown an upward trend over the decades (O’Connor, Lucey, Batten, &Baur,
2015), there is no respite in the consumption of gold in India except during the periods
with state restrictions. Much of the gold that is consumed goes out of circulation and is
not available for further economic activity. One of the consequences of this high
consumption of gold and the high level of stickiness is that India is a significant net
importer of gold, which adversely affects the Current Account Deficit (CAD) (D’Souza,
2015)

In Indian households, over 20,000 tons of gold is lying idle. To turn this unused gold into
a productive asset, the Government of India launched the Gold Monetization Scheme
(GMS). The scheme was launched by the Prime Minister of India in 2015 with an aim to
mobilize gold and facilitate its use for productive purposes, which further will also help
in reducing India’s dependability on gold imports. The scheme will also benefit jewellers
by allowing them to obtain loans. Lending institutions such as banks and NBFCs too will
be able to monetize this gold.
Though GMS was announced in the Budget to replace the hitherto existing Gold Deposit
Scheme (GDS) (1999) and Gold Metal Loan (GML) Scheme (1998) as it is a
combination of the best features of both the schemes, in the press release dated 9
September 2015 it is mentioned that GMS would consist of revamped GDS and GML.
RBI in its guidelines later clarified that the GMS will replace the existing Gold Deposit
Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will
be allowed to run till maturity unless the depositors prematurely withdraw them. RBI also
clarified that existing gold metal loan (GML) Scheme would continue parallel to the
GMS linked GML. The existing Gold Deposit Scheme (GDS) is in the nature of a fixed
deposit in gold. Under GDS, the customers (individuals and institutions) can deposit their
idle gold (bullion, coin or jewellery in scrap form) with banks in return for safety, interest
earnings and tax benefits. Interest is calculated in Gold currency (XAU) and paid in
equivalent rupees. Banks may either issue a passbook/statement of account or a
certificate/bond to the depositors for deposit of gold, which will be transferable by
endorsement and delivery. Under Gold Metal Loans Scheme of 1998, nominated banks
authorized to import gold could give Gold (Metal) loans to jewellery exporters and
manufacturers for a period of 90 days. GMS integrates both the above schemes into one
with some changes.

It was noted that the Gold Deposit scheme has met with limited success. According to the
report of the KUB Rao Committee, some of the reasons are :-

(i) high melting costs

(ii) Very high ticket sizes.

The report acknowledges the fact that in the scheme, since the customers do not get back
the jewelleries deposited in its original form, therefore, it has met with limited
acceptability in the Indian context, as people have emotional and sentimental attachments
with their gold jewels which are lying with them for generations. Various reasons like the
lack of infrastructure with the banks for running the scheme, limited number of bank
branches authorized to operate GDS, high transaction cost, constraints on the minimum
deposit amount etc. explain the limited reach and success of the GDS. The GMS was
launched to correct these deficiencies.

Eligibility of the Depositor of the Scheme

This Scheme is open only for the Resident Indians who can be any of the following:

Individual owners of gold Trusts- including Mutual Funds or Exchange Traded Funds
registered under the SEBI (Mutual Fund) Regulations

Trusts- including Mutual Funds or Exchange Traded Funds registered under the SEBI
(Mutual Fund) Regulations
The depositors are required to comply with the rules of customer identification applicable
for opening any deposit account, for the purpose of opening

Objectives of the study

Objectives of project are different from company under consideration

The objective of the study includes:

● to understand the concept of gold monetization scheme in India

● to learn about the benefits related to the scheme
● to evaluate the different incentives relating to the monetized gold
● to study about the acceptability of the scheme among Indian customers
● to evaluate the end results of the scheme enforced

Research methodology

The types of data used are primary and secondary data.

Primary data is information collected through original or first-hand research. For

example, surveys and focus group discussions.

Secondary data is information which has been collected in the past by someone else. For
example, researching the internet, newspaper articles and company reports.

The data used in the project has been collected through various and different types of
web resources

The concepts relating to benefits of the scheme have been collected from various books
and magazines including
Many government relating sites have also been used to learn about the rules and
regulations of the scheme.

Various surveys and interviews have been analyzed to study the opinion of the people
regarding the scheme and its acceptability
CHAPTER 2

The Gold Monetization Scheme is relatively new – it was introduced by the Central
Government only in 2015-16. The objective is to simultaneously safeguard the gold held
in Indian households as well as put it to productive use. The larger objective is to cut
down the country’s gold imports by decreasing domestic demand. India, incidentally, is
the second-largest consumer of gold after China.

Features of Gold Monetization Scheme

1. Easy storage of your gold: The general tendency among Indians is to deposit
their gold in storage lockers in banks and take it out for weddings/family functions or
to sell it off. However, you have to pay an annual fee to the bank for the storage
locker. This means that you are actually spending money just to keep your gold safe.
Gold Monetization Scheme offers security to your gold by not only storing it but also
returning it to you in the form of money or physical gold when the plan attains
maturity.

2. Utility for your gold: Keeping your old or unutilized gold inside a safe deposit
locker in your house or even in a bank means that your gold is lying idle and gives
you no benefit. Even if you sell off the gold, you only earn spot money. But
depositing it in the Gold Monetization Scheme will not only get you interest money,
but you also have the option of encashing the gold at maturity. This way, you can take
advantage of the appreciating value of gold.

3. Flexibility in deposits: You can deposit your gold in any form under the Gold
Monetization Scheme. You could put in gold bars or coins, and even jewellery.
 However, gold jewellery encrusted with gemstones cannot be deposited in this
scheme.

4. Flexibility in quantity of deposit: The minimum deposit you can make in a gold
monetization scheme is 30 grams of any purity. There is no maximum limit.

5. Convenient tenures: There are 3 term deposit plans available under the Gold
Monetization Scheme:

1. Short term: 1 to 3 years

2. Medium term: 5 to 7 years
3. Long term: 12 to 15 years

6. Attractive interest rates: For a product that usually remains idle in homes and
lockers, the precious metal will earn you between 0.5% to 2.5% interests depending
on the period of deposit. Short-term deposit rates are decided by the banks concerned,
while the medium and long-term deposit interest rates are decided by the Central
Government. The interest rates currently being offered is as follows:

4. Short-term rates (at SBI): 0.5% p.a. for 1 year, 0.55% for 2 years, 0.60% for
3 years.
5. Medium-term rates: 2.25% p.a. for 5 to 7 years.
6. Long-term rates: 2.5% p.a. for 12 to 15 years.

5. Variety in interest calculation: The short-term bank deposit under the Gold
Monetization Scheme does not calculate interest in the form of money. It gives you
interest in the form of gold in grams. So if the interest is 1% per annum, you get 1
gram on 100 grams. However, the medium and long-term government deposit
schemes calculate the interest in the form of rupees with reference to the value of
gold at the time of deposit. So if you deposited 50 grams at a value of Rs. 1,50,000
and the interest rate is 2.5%, you will get Rs. 3,750 as interest in a year.
6. Withdrawal of the deposit: For short-term plans, you can specify at the time of
deposit whether you want the returns to be made to you in the form of money or
physical gold. If you choose to have your returns as physical gold, you get it as gold
coins or bars in 995 fineness. You do not get your jewellery back in the same form as
you put them in, because the banks are not storing your gold. Banks convert the gold
you deposit into bullion or coins and either send it to Metals and Minerals Trading
Corporation of India for minting India Gold Coins, or sell it to jewellers or other
banks.

7. Verification of purity: Over 330 Collection and Purity Testing Centres have been
approved across the country to evaluate and verify the purity of the gold being
deposited. Once you open a gold monetization scheme account in a bank, you will
have to take your gold to the nearest government-approved collection centre, where
the purity and quantity of your gold will be checked. The centre will take your gold
and provide you a receipt for the gold quantity, which will be converted to a scheme
certificate when deposited in the bank.

8. Tax benefits: You do not have to pay capital gains tax on the profits made through
the gold monetization scheme. The capital gains are also exempt from wealth tax and
income tax.
Objectives and benefits of the gold monetization scheme

The Gold Monetization Scheme (GMS) was announced in the union budget (2015-16)
with the following objectives:

● To mobilize the gold held by households, trusts and various institutions in India
and put it into productive use.
● To provide a fillip to the gems and jewellery sector in the country by making gold
available as raw material on loan from the banks.
● To be able to reduce reliance on import of gold over time to meet the domestic
demand, as India is one of the largest consumers of gold with virtually no
domestic production. (India imports as much as 800-1000 tons of gold each year.
Though stocks of gold in India are estimated to be over 20,000 tones, most of this
gold is neither traded, nor monetized.)
● To make the existing schemes for mobilizing Gold (Gold Deposit Scheme and
Gold Metal Loan Scheme) more effective and to broaden their ambit from merely
mobilizing gold, to putting this gold into a broad range of productive uses
including strengthening the reserve requirements of the Central Bank.
The Operational Aspects of Gold Monetisation Scheme
the Gold Monetization scheme consists of the revamped versions of the Gold Deposit
Scheme (GDS) introduced in 1999 and the Gold Metal Loan Scheme (GML) introduced
in 1998. The detailed operational mechanism along with revisions made to the existing
schemes are mentioned below.

 A)  Accepting of Gold Deposits - Revamped Gold Deposit Scheme

● Institutions Concerned: The banks will enter into a tripartite Legal Agreement
with refiners and Collection and Purity Testing Centres that are selected by them
to be their partners in the scheme.

● Collection, Purity Verification and Deposit of Gold: Out of the 331 Assaying
and Hallmarking Centres spread across various parts of the country, those which
will meet criteria as specified by Bureau of Indian Standards (BIS) will only be
allowed to act as Collection and Purity Testing  Centres for the purpose of this
scheme. The number of these centers is expected to increase with time. The
minimum quantity of gold that a person can bring is proposed to be set at 30
grains (corrected up to three decimals). Gold can be in any form (bullion or
jewellery) and of any purity standards.

● Creation of Gold Savings Account: In the revamped scheme, a Gold Savings

Account will be opened by depositors at any time with Scheduled Commercial
Banks, after subjecting themselves to the know your clients(KYC), as applicable.
This account would be denominated in grams of gold.
● Transfer of Gold to Refiners: Collection and purity testing centers will send the
gold to the refiners. The refiners will keep the gold in their warehouses, unless
banks prefer to hold it themselves. For the services provided by the refiners, they
will be paid a fee by the banks, as decided by them, mutually. The depositor will
 not be charged. Gold depositors can also give their gold directly to the refiner
rather than only through the Collection and Purity Testing Centres (CPTCs). This
will encourage the bulk depositors including Institutions to participate in the
scheme.

Attractiveness of the schemes for individuals and banks

Indian households though have been assumed to be sitting on 20,000 tons of gold, they
would not invest in any scheme if the return is not attractive. The Gold Deposit Scheme,
1999 was unacceptable to the investors mainly due to the reason that, the interest rate
charged on the deposits did not exceed more than one percent. Thus, the lessons learnt
from the past has been revisited in the present schemes by increasing the deposit rates
between 2.25 -2.5 percent (for medium and long-term GMS schemes) to encourage
investors. The other characteristic, which remains unaltered, is the exemption of the
deposit schemes from income tax, wealth tax and capital gains tax. So the important
questions which needs to be asked are, whether

∙Indian Banks consider these guidelines provided, sufficient and financial viable to
participate by offering these schemes at lucrative interest rates.

∙Indian investors would change their preference to mobilize idle gold, to be put for more
productive use.

∙Indian government and Central Bank of India would further consider taking steps in line
with measures taken in Turkey and China in rebuilding infrastructure around gold such as
gold exchange and world class London Bullion Market Association certified refineries
that produce gold bars and coins which would facilitate in developing domestic market.
Benefits of the Gold Monetization Scheme

● The scheme will help in mobilizing the large amount of gold lying as an idle asset
with households, trusts and various institutions in India and benefit the Indian
gems and jewellery sector which is a major contributor to India's exports. In fiscal
year 2014-15, gems and jewellery constituted 12 per cent of India's total exports
and the value of gold items alone was more than $13 billion (provisional figures).
● The mobilized gold will also supplement RBI’s gold reserves.
● It will help in reducing the Government’s cost of borrowing.

Over the course of time this is also expected to reduce the country's dependence on the
import of gold.

Benefits for Depositors:

Low Investments– The best part of this Scheme is that one can start an investment with as
low as 30 grams of gold. Along with this, it also offers a considerable degree of
flexibility to the depositors to withdraw their investment whenever they need it or are not
c

Reduction of carrying cost– As per the current norms of storing gold with banks, the
owners are required to pay locker charges for the storage of their gold safely with the
bank. But as per this Scheme, an individual is not required to pay any locker charges on
its deposit.

Earning interest– As per the current scenario, the gold that lies in the locker remains idle
irrespective of the appreciation in its value. But as per this Scheme, an individual storing
gold with the bank will also receive a regular interest or dividend. The amount to be paid
by way of interest shall depend on the weight of gold along with the appreciation of the
metal value in the market. The customers also have the option to decide at the time of
deposit as to whether they would want their return in terms of gold (equivalent to 995
fineness gold) or Indian rupees.
Exemption from certain taxes– The earnings from this gold is also exempted from capital
gains tax, wealth tax and income tax.

Benefits for banks and economy

- The banks can also earn by selling the gold or lending the gold accepted under short-
term deposit, either to MMTC for minting India Gold coins or to jewelers. It may even
sell it to other designated participating banks under the scheme.

It will substantially reduce the loss of foreign currency on importing gold.

Economic viability for banks

In our interviews with various experts, we received contrasting inputs on whether the
GMS represents a profitable proposition for banks. One of the experts we interviewed felt
that the GMS allowed a decent spread of 3.25-3.75 per cent for the banks – this was
based on a calculation which assumed that jewellers will be comfortable in paying an
interest rate of 6.0- 6.5 per cent on gold they avail from banks on loan, and that banks
will be required to pay an interest rate of 2.75 per cent to depositors under the GMS
(thereby, banks’ spread = 6.0-6.5 per cent minus 2.75, that is 3.25-3.75 per cent). Another
expert, however, believed that the spread of 3.25-3.75 per cent was not enough to cover
the logistic expenses of running the scheme such as processing fee, insurance,
transportation costs, transaction costs etc. Hence, the question of economic viability of
the scheme for banks remains unanswered. Another finding was the asset-liability
mismatch, with gold deposits being short-term and gold loans being long term, as a factor
that needs to be addressed.
Lack of a Standard Operating Procedure (SOP) for banks The banks do not have
standardized operating and accounting guidelines so far, creating ambiguity in the
system. Also, the gold that has been mobilized by the scheme till now lies idle with banks
(which are bearing the carrying costs) and the process of how the gold can be auctioned
to the jewellers has yet to be finalized. CPTCs are not designed to handle retail customers
The entities that have been recognized as CPTCs by the BIS were erstwhile hallmarking
centers for jewellers– they are not equipped to deal directly with consumers. The CPTC
in Bangalore is located on one of the most crowded streets in Bangalore with no parking
facility available nearby. The CPTC itself was located on top of a mechanical workshop,
and was not noticeable as there was no board installed outside it. Such factors may result
in people, especially women, not wanting to visit the CPTC to deposit gold. Absence of
CPTCs in major metropolitan cities in India Across India, only 48 assaying and
hallmarking centers which have been granted the BIS license to operate as CPTCs.20
While metropolitan cities like Bengaluru and Chennai have only one CPTC in the entire
city, cities such as Vishakhapatnam and Hyderabad have no CPTC at all. Similarly, in
states like Punjab, Rajasthan and Madhya Pradesh, where there is high affinity for gold,
there are no CPTCs at all. Such low CPTC coverage in the country may hinder the pan-
India adoption of the scheme.
Reasons for the fail of gold monetization scheme

Nearly 18 months after it was first launched, the Narendra Modi-led government’s gold
monetization scheme is yet to find many takers. In response to a Lok Sabha question, the
government revealed that till mid-February this year, the scheme has led to deposits
worth only 6,410 kg of gold since it was launched, less than 2% of the annual imports of
the yellow metal in 2016.

Launched to curb India’s massive gold imports, which contributes significantly to India’s
trade deficit, the scheme allows a bank’s customers to deposit their idle gold holdings for
a fixed period of time in return for an interest in the range of 2.25% to 2.50%, and
redeem it on maturity either in the form of gold or its rupee-equivalent amount.
According to Union finance minister Arun Jaitley, Indian households (and temples)
collectively own 20,000 tons of gold, a figure that is equivalent to the combined amount
of gold held by the central banks of the US, Euro area and China.

The government hoped that its initiative will help monetize a significant chunk of such
gold holdings, which would then be melted and sold/lent to jewellers (and other users of
gold), to reduce India’s dependence on imports.

But so far, the response to the scheme seems to have been extremely tepid. Gold imports
still account for more than one-fourth of India’s trade deficit and the country remains the
largest importer of gold in the world despite having ceded the title of the “largest
consumer" to China in the last few years. 

One reason why many households are unwilling to park their gold in banks is the low
interest rates on offer, according to a survey of 61,000 households conducted last year.
The Household Survey on India’s Citizen Environment & Consumer Economy (ICE 360°
survey) was conducted by the independent not-for-profit organization, People Research
on India’s Consumer Economy, headed by two of India’s best-known consumer economy
experts, Rama Bijapurkar and Rajesh Shukla. The survey was partly financed by the
World Gold Council.

Low returns, lack of awareness and a fetish for hoarding the yellow metal in the
country seem to have led to the tepid response to the gold monetization initiative.

Nearly 18 months after it was first launched, the Narendra Modi-led government’s gold
monetization scheme is yet to find many takers. In response to a Lok Sabha question, the
government revealed that till mid-February this year, the scheme has led to deposits
worth only 6,410 kg of gold since it was launched, less than 2% of the annual imports of
the yellow metal in 2016.

Launched to curb India’s massive gold imports, which contributes significantly to India’s
trade deficit, the scheme allows a bank’s customers to deposit their idle gold holdings for
a fixed period of time in return for an interest in the range of 2.25% to 2.50%, and
redeem it on maturity either in the form of gold or its rupee-equivalent amount.

According to Union finance minister ArunJaitley, Indian households (and temples)

collectively own 20,000 tons of gold, a figure that is equivalent to the combined amount
of gold held by the central banks of the US, Euro area and China.

The government hoped that its initiative will help monetize a significant chunk of such
gold holdings, which would then be melted and sold/lent to jewellers (and other users of
gold), to reduce India’s dependence on imports.

But so far, the response to the scheme seems to have been extremely tepid. Gold imports
still account for more than one-fourth of India’s trade deficit and the country remains the
largest importer of gold in the world despite having ceded the title of the “largest
consumer” to China in the last few years.

One reason why many households are unwilling to park their gold in banks is the low
interest rates on offer, according to a survey of 61,000 households conducted last year.
The Household Survey on India’s Citizen Environment & Consumer Economy (ICE 360°
survey) was conducted by the independent not-for-profit organization, People Research
on India’s Consumer Economy, headed by two of India’s best-known consumer economy
experts, Rama Bijapurkar and Rajesh Shukla. The survey was partly financed by the
World Gold Council.

The survey shows that relatively educated and wealthier households showed slightly
greater willingness to park their favorite metal with banks, suggesting that the lack of
adequate information or understanding about the gold monetization scheme could, in
part, be responsible for the tepid response. But even among the wealthy and educated lot,
a majority of households were not too enthused about the idea of depositing their gold
holdings in banks. 54% of households headed by a graduate were either undecided or not
in favor of parking their gold holdings in a bank. Among illiterate households (which are
also poorer on average), 72% were either undecided or against gold monetization.
One reason why many households are unwilling to park their gold in banks is the low
interest rates on offer, according to a survey of 61,000 households conducted last year.
The Household Survey on India’s Citizen Environment & Consumer Economy (ICE 360°
survey) was conducted by the independent not-for-profit organization, People Research
on India’s Consumer Economy, headed by two of India’s best-known consumer economy
experts, Rama Bijapurkar and Rajesh Shukla. The survey was partly financed by the
World Gold Council.

The survey shows that relatively educated and wealthier households showed slightly
greater willingness to park their favorite metal with banks, suggesting that the lack of
adequate information or understanding about the gold monetization scheme could, in
part, be responsible for the tepid response. But even among the wealthy and educated lot,
a majority of households were not too enthused about the idea of depositing their gold
holdings in banks. 54% of households headed by a graduate were either undecided or not
in favor of parking their gold holdings in a bank. Among illiterate households (which are
also poorer on average), 72% were either undecided or against gold monetization.

Lack of incentives

Lack of incentives for key players like banks and refiners, among others coupled with
lack of awareness on the Gold Monetization Scheme(GMS) led to poor response, found a
study conducted by the Indian Gold Policy Centre (IGPC) at the Indian Institute of
Management, Ahmedabad (IIM-A).

"It can be said that GMS has not been a successful policy. Our research has identified the
areas of policy, which can be tweaked to make it more attractive for the key players of
the scheme i.e. consumers, and bankers and refiners," said Arvind Sahay, head of IGPC.
The study 'Gold Monetization in India as a Transformative Policy' by IGPC is an in-depth
analysis of the buying pattern of gold in India. With an aim to suggest improvisations for
a better implementation of GMS that was introduced in 2015, a nationwide survey was
carried across 1,171 households, from 10 states that constitute approximately three-
quarters of annual national gold consumption.

IIM-A's IGPC interviewed top officials of six banks, five refineries and one industry
consultant to understand the challenges and implications of the policy for the gold
industry.

The study thereby found that lack of incentivisation led to banks losing interest in the
scheme since deposit of gold or selling coins did not comprise as banks' key operations.

Banks are also struggling to promote products based on gold monetization policy and
seek more control on the process to have a clear separation of risks or effective mitigation
of risks relating to the operationalization of the policy.

"The scheme is not part of their core business and hence, the government should
incentivize banks for GMS. Inadequate experience in quality management of gold and
lack of sufficient incentive alignment have been pointed out as the main reasons why
banks are not yet fully on board. Process issues such as turnaround time and logistics
requirements also deter banks and refiners from taking up the policy," said Sahay.

According to the study, the households revealed a tendency to accumulate gold for
purposes ranging from marriage to child's education; about 50 per cent of respondents
who accumulate gold in small quantities do so for marriage of child or self.

Rural consumers were found to be more unwilling to part with gold as compared to urban
consumers. However, rural consumers were also ready to pledge gold as collateral, with
74 per cent of rural consumers being open to pledging their gold, suggesting 'liquidity
use' of gold on the basis of requirement, the study found.
"Moreover, high income urban consumers hold a high proportion of their assets in the
form of gold, indicating the use of gold for investment purposes, and implying its scope
for monetization," said Sahay.

Chapter 3

Conclusions and Recommendations

Monetization of gold involves mobilizing gold accumulated by Indian households to

ensure that it plays a growth oriented role in providing financial resources for
development of Indian economy. This concept is not new in India, but was
implemented earlier without much success. The gold monetization scheme as
launched by the Government of India in November 2015 is an improvised version of
the erstwhile gold schemes, making it much simpler for prospective depositors to
participate in the scheme, making it a win-win situation for both the government, and
the end consumers. Formulation and successful implementation of a policy around
gold can never be easy task because of sentimental value of gold for an Indian. Thus,
sustained efforts from all key stakeholders (governments, jewellers, central banks
etc.) are a must if the Government has to be successful in mobilizing gold under the
schemes. Having launched the scheme in November 2015, and not been able to
successfully mobilize enough gold since then, it is imperative for the government to
identify gaps in policy formulation and implementation on gold, and ensure that such
 identified gaps are addressed, to encourage confidence and participation from
households without which the policy will not be able to achieve its intended objective
of reducing dependence on imports of gold.

There is little international experience on tapping gold within the economy except
that from Turkey but the following differences between the Indian and Turkey models
of gold monetization highlight issues regarding model’s replicability in India -
Turkey’s model does not have CPTCs as intermediaries – as refineries and banks
work directly with each other to make the scheme work; Gold Collection Days at
banks, organized by refiners to compensate for lack of expertise in regularly handling
gold; and despite both countries’ insatiable appetite for gold, the economy and
maturity of the gold industry in the two countries are very different

Performance of Gold Monetization Scheme

The amount of gold held in India is estimated at 21,000 tons (WGC, 2014). But,
according to data available as of July 14, 2016, eight months since the scheme was
launched in November 2015, total gold collections under GMS from temples and
households was a meagre 3.1 tons. Further, majority of this collection had come from
temples rather than from households. Till April 2016, around 1.5 tons had been
claimed to be mobilized under GMS from temples ever since its launch in
November.14 This is much less compared to the amount of gold estimated to be with
these temples (see Annex 2).15 Also, so far only eight temples – four from Tamil
Nadu and others from Jammu Kashmir, Andhra Pradesh and Maharashtra - have
invested in the scheme.
 As on April 2016, only 47 CPTCs have been granted license by the Bureau of Indian
Standards (BIS) to collect and test deposits under GMS (Bhayani, 2016). For the
scheme to work, banks, refineries and CPTCs are required to enter into tripartite
agreements that define responsibilities of each party. As of now, only 17 CPTCs have
entered into such agreements (Bhayani, 2016). Also, according to Secretary,
Association of Gold Refineries and Mints, slow accreditation of new refineries by
BIS is impeding the offtake of the GMS.

Evaluating Success of GMS:

Methodology and Insights We used the following techniques/ instruments to analyses the
performance of the Gold Monetization Scheme:

1. Focused semi-structured interviews conducted with key stakeholders including:

a. Consumers

b. Local jewellers and pawnbrokers

c. National gold retail outlet

d. Banks

e. Gold refineries

f. CPTC

g. Researchers

2. First-hand experience of the end-to-end process flow of the GMS using real gold
samples.

3. Online survey on social media forums to gauge people’s views across religions and
demographics on their sentiment towards utilization of gold held by religious
institutions (153 responses)
References:-

 Author: Not specified

Publication Date: 2017, February 8
Title: Revised Final Working Paper on Gold Monetisation
URL: https://www.iimb.ac.in/sites/default/files/2018-07/Revised%20Final_WP_Gold
%20Monetisation%20Feb8%202017.pdf
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monetisation-scheme-to-make-it-more-attractive/articleshow/64499211.cms
 http://www.arthapedia.in/index.php?title=Gold_Monetisation_Scheme
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