"Banks' core competence is currency and credit, not precious metals"

Rajesh Khosla, MD, MMTC Pamp

Dilip Kumar Jha  |  Mumbai  

September 13, 2014 Last Updated at 16:56 IST

MMTC PAMP has proposed the government the re-launch of a Gold Monetisation Scheme (GMS) with 2-3% interest and a minimum 40-50 grams of gold deposits. The key for the scheme's success will be lower quantity of minimum deposit along with trust and expertise of MMTC says Rajesh Khosla, managing director of MMTC Pamp, India's only LBMA (London Bullion Markets Association), approvedrefinery in an interview with Dilip Kumar Jha. Edited excerpts :

Why gold monetisation scheme?

Introduced originally in 1999, Gold Monetisation Scheme(GMS) intends to provide an opportunity an individual to earn interest on idle asset with safety liquidity and tax benefits. At the same time idle gold in the country can be put into productive use and reduce import. RBI had accordingly formulated guidelines to enable banks authorized to deal in gold to prepare their own Gold Deposit Scheme (GDS). However, this scheme did not get a very good response from the Indian households.

India's march towards attaining self-sufficiency in gold hinges on its ability to mobilize a significant part of the 25,000 tonnes of its above ground holding in investment bars and jewellery forms. Various schemes tried in the past to mobilize gold from individual households and reduce imports thereupon but with little success. Past schemes were tailored for banks and large gold holders overlooking the yellow metal held by India's teeming millions.

SBI launched such scheme in 2009 with hardly any response. Where, according to you, SBI went wrong ?

State Bank of India launched GDS in 2009 when the global economic turmoil had created demand for the yellow metal. According to this scheme if you possessed gold you could deposit it at bank and earn a small interest on it. Under this scheme the interest and the deposit were exempted from wealth tax, capital gains tax and income tax on interest earned. In case of exigencies you could pledge the GDS and avail loan. However, since minimum deposit was 500 grams, it could not fetch an encouraging response.

Banks' core competence is currency and credit, not precious metals. It is appropriate that banks focus on what they are good at-mobilizing deposits and handling the risks associated with transforming them into loans. Transparency in assurance, storage, tracking and management of metal deposits are best done by an organization that has the competence to provide the precious metal part of the transaction on behalf of the banks.

How is this scheme different from the one by SBI ?

The new gold monetizing scheme will treat gold deposit like fixed deposits and interest earned on it will be paid in gold instead of rupees. A 'gold account' will have to be opened with the bank by the retail customer. The gold can then be deposited for a maximum tenure of three years and the rate of interest will be tentative depending upon the prevailing interest scenario. Banks can lend this gold to jewellers or deposit it with the Reserve Bank of India that will free rupee liquidity which in turn will have an impact on the earnings. Bullion industry has already made a presentation on the scheme to leading banks in the country and is waiting for their response. According to the new gold monetization scheme proposed with RBI, a gold account holder can place as little as 20 gm of gold with the bank. The scheme if implemented will address more than 90% of gold consumers in India, who do not possess more than 500 gm of gold. It will be fine tuned further basis the feedback from banks which are contesting it on the ground of consumer guarantee on the purity of gold.
 

What prompted you to launch GMS ?

Last year, the current account deficit has snowballed and became the biggest worry for the government. Gold accounts for second largest import in value terms after oil. The new government is keen on introducing schemes to cut down dependence on imports and I am hopeful that a modified GMS will be implemented soon that can cater to the vast population that holds gold.

What's MMTC PAMP's interest in GMS ?

MMTC -PAMP will be an enabler in the GMS since it is the only refinery to be accredited with LBMA (London Bullion Markets Association) MMTC-PAMP is working on advanced software which would be ready by October. It will take a while but we are in preliminary discussions with banks to fine tune the scheme as it will involve a huge logistical exercise and has many stakeholders.We will collect, assay, transport, refine and re-transport gold as instructed by banks if the scheme takes off.

MMTC-PAMP, is working on a gold metal account scheme that would help small retail gold consumers deposit their gold, melt and earn interest on it. It is a move that could help mitigate the meagre gold supply situation in India, which has caused a high current account deficit (CAD) owing to high imports. This would go a long way in helping the country meet its 'insatiable appetite' for gold.
 

What are the key to the scheme's success ?

The successful implementation and operation of an all India Gold Monetisation Scheme depends on; a) national network of Purity Verification Centers, b) world class refining and fabrication facility, c) secure storage and distribution services, and d) end-to-end software customized for the operations. Further the Scheme must cater to the requirements of all stakeholders, viz. retail depositors, jewellers / borrowers, Banks and RBI. It must support all related business flows and in the ultimate analysis enable efficiency gains. The advent of world-class domestic refining in India finally provides this platform.

Such a well-coordinated GMS motivates banks due to inherent advantages of verified collateral based lending by Banks; households that hold gold unproductive benefit by providing an easy mechanism to unlock the value of their asset by a reliable and credible institution that values that asset in a manner that gives high weight to customer service; and all this circumscribed by the ease of monetizing gold as simple as operating ones' bank account.

What is the progress of the proposal ?

A concept has been proposed to the Government. We will have to involve banks, the RBI and the Finance Ministry. At this stage, we are explaining to all stake-holders how the scheme will work.

A customer has to forego at least 15% of making charges on jewellery while converting ornaments into pure gold. They get gold on surrendering the account which on conversion into jewellery will cost them 15%  more as making charges. So, consumers will earn just 8-9% against their accumulative loss of 30%. How will this scheme beneficial for consumers ?

When a customer comes to a purity verification center, its gold is melted and assayed in front of the customer. There is negligible charge since the gold is for the GMS and its subsequent re-deployment will generate the economic return for the bank. The cost to the customer will be less than 1%. The customer has the assurance of the bank on the gold it has put on deposit.