In Bharat’s imports, crude oil occupies the first place whereas gold is in second position. On an average we import 800-900 tonnes of gold annually and Bharat is the third largest gold importing countries in the world next to Switzerland and China.
According to the estimates of the World Gold council made in 2017, Dubai around 23000-24,000 tonnes of gold is lying in Bharat in various forms (i.e., ornaments, bars, coins etc.). Earlier to this in 2013 RBI made a study and estimated that around 18,000-20,000 tonnes of gold is with the people of the country in various forms. However, as per official data the gold reserves held with RBI are just 653 tonnes as of March, 2020.
The gold deposit scheme originally introduced in 1999 was modified in 2015 as gold monetization scheme by the government. The objective of this scheme is to bring into the economy the idle gold lying with the people and convert it from a physical asset to financial asset. However, this scheme could so far mobilise just 16 tonnes of gold.
Under this scheme the government intends to gather the gold from the public, melt it and in turn sell it to the gold jewellers so that the gold import could be reduced. Unfortunately this scheme has not become successful. Under this new scheme, 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 (under the hitherto gold deposit scheme the minimum deposit was 500 grams of gold). There is no maximum limit for deposit under the scheme.
People can deposit their gold under this scheme even in the form of jewelery which will be melted and converted into bars. The purity of the gold will be assessed and accordingly, a certificate will be issued to the depositor. The depositor can buy the certificate for a short term of 1-3 years directly from the banks and certificates issued by banks on behalf of the government for a medium term of 5- 7 years or even a long term of 7-12 years. The interest rate for short term deposit will be determined by the banks.
On maturity the deposit holder can get the gold or cash. The interest on these certificates is exempted from income, wealth or capital gains taxes. Premature withdrawal is permitted subject to a minimum lock-in period and penalty to be determined by individual banks for the short term bank deposit and by the government for medium term and long term deposits.
These options were expected to be more attractive and provide greater flexibility, thereby garner large quantum of gold under this scheme for monetization.
Resident Bharatiyas (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI Regulations and Companies) can make deposits under the scheme. Major chunk of Bharat’s estimated 24,000 tonnes of gold (worth $1.28 trillion i.e., 46% of GDP) is with HNIs and religious organizations/ temples, and this scheme was expected to target these segments.
However, as this scheme covers raw gold (bars, coins, jewellery excluding stones and other metals) which will be melted and converted into bars, most of the HNIs and religious organizations/ temples did not opt for this scheme as this will result in losing the identity of their gold jewellery/ ornaments.
History has proved increasing the import duty on gold has not deterred Bharatiya people from importing the gold nor the current gold monetization scheme could succeed in encouraging the people to deposit their gold under this scheme.
Suggestions to make this Gold Monetization Scheme Successful
To convert the current Gold Monetization Scheme into a derivative gold bond and induce the people to deposit their gold with the banks under trust receipts/ safe custody where the gold so deposited will not be melted but kept intact. To make this gold bond scheme flexible and popular people may be permitted to withdraw their gold ornaments on special occasions and redeposit once the occasions are over.
These trust receipts/safe custody could contain a clause authorizing banks to raise funds against the gold deposited so that a derivative financial instrument can be floated by the banks backed by gold held with them under trust receipts/safe custody.
As a consideration for the people authorizing the bank to raise funds against the gold so deposited, the bank could even pay some fee on these trust receipts/safe custody and waive the rent on the gold so deposited under such trust receipts/safe custody. Government could give a counter guarantee (comfort of repayment) to these derivative financial instruments and develop active primary and secondary markets for these derivative financial instruments by encouraging players from Bharat and abroad.
The funds so mobilized could be used by banks for long term infrastructure projects of national importance for both EPC (Engineering, Procurement and Construction) and PPP (Public Private Partnership) models. Redemption of these bonds to be made by the banks from the repayments of these infrastructure project loans by the contractors on receipt of the funds from government on completion of the projects under EPC models or out of the funds generated through toll/ fee collections under PPP ventures.
The following steps form part of the proposed Derivative Rupee Gold Bond Scheme:
1. Customer deposits gold in bank under trust receipt/safe custody by giving the full details of gold so deposited.
2. After due verification and valuation of the gold so deposited the bank gives a trust receipt/safe custody receipt to the customer.
3. Customer has the option to withdraw the gold as per his requirements and again redeposit the same with the bank (like in the case of a locker.)
4. Additionally, the customer gives a consent to the bank (which will be part of the terms and conditions of the trust receipt/safe custody) authorizing the bank to mortgage his gold to raise funds.
5. As a consideration of the customer giving authorization to the bank as above, the bank may pay bi-annual fee (say 1%) to the customer and waive the rental fees for depositing gold under trust receipt/safe custody of gold.
6. Based on the customer’s consent, as above, the bank in turn issues a derivative rupee financial instrument/bond (which is backed by the gold for the face value of the bond) for a tenor of 5 years, 10 years and 15 years to raise funds. These bonds will be co-accepted/ counter guaranteed by government.
7. This derivative rupee gold bond may be issued for a minimum of Rs. 5 lakhs and in multiples thereof fully backed by gold.
8. Primary and secondary markets can be developed for these derivative rupee gold bonds by encouraging financial institutions and other notified eligible entities from Bharat and abroad to invest in the same. The interest rate for the primary issue of these bonds may be fixed at slightly higher than the interest rates of government bonds for the respective tenors (i.e., 5 years, 10 years and 15 years).
9. Operational mechanism- In order to ensure that at all points of time during the tenure of this derivative rupee gold bond the gold held with the banks fully covers the face value of the bond, the banks may restrict the issue value of these bonds to say 30%-40% of the gold holdings held with them.
This will also have to take care of additional quantum of gold required due to (i) the market price fluctuations of gold since at any point of time the issue price of derivative gold bond has to be fully backed by gold; as well as (ii) the short fall in the quantum of gold held by the banks due to temporary withdrawal of the gold deposited by the clients as permitted by the terms of the trust receipt/safe custody contract.
10. Usage of the funds mobilized through derivative gold bonds- The banks will lend these funds to long term infrastructure projects, giving priority to PPP projects that are of longer tenor and of national importance.
11. RBI to consider giving preferential treatment to these funds raised by the banks through derivative rupee gold bond with regard to SLR and give full exemption of CRR. The funds so raised by the banks may be treated as tier II capital so that the public sector banks can acquire additional capital which is the need of the hour and it will give some respite to the central government and reduce its burden on infusion of additional capital to these PSBs.
The banks may be permitted to issue these derivative gold bonds as OFCDs (Optionally Fully Convertible Debentures) so that the banks will have the option to exercise to convert these bonds into equity on maturity.
12. Government and RBI may even think of floating a separate subsidiary to handle this total mechanism (i.e., Gold Holding Corporation of India) as a custodial entity and the banks may act as its agent to take care of the operational aspects.
Benefits of the proposed derivative rupee bond scheme
The above mechanism suggested will provide the benefits of
(i) retaining the gold jewellery/ornaments intact in their original form avoiding the process of melting of gold and converting into gold bars;
(ii) withdrawing the gold jewellery/ ornaments for special occasions like marriages and other functions once in a while from the bank like in the case of lockers and
(iii) on maturity of the safe custody period ( as chosen by the depositor say, 5 years, 10 years and 15 years) the depositor will get back his gold intact as he had originally deposited with the bank.
Religious institutions like temples etc., and HNIs could be the potential depositors of gold for this proposed derivative gold bond scheme since the gold deposited by them will not be melted unlike the existing scheme. This gold backed rupee derivative bond co-accepted/ counter guaranteed by the Government of Bharat will certainly attract investors from Bharat and abroad compared to clean bonds and this could perhaps be the first such innovative instrument in the global financial markets.
In 1991, Bharatiya government had to mortgage 47 tonnes of gold reserves to raise $. 405 million to overcome the financial crisis. The current economic crisis due to COVID-19 throws open a much greater golden opportunity to the Bharatiya government to raise at least Rs. 4 lakh Crores as long term debt by monetizing 1,000 tonnes of gold under the derivative gold bond out of the available 24,000 tonnes of gold lying with the people.
According to the data of Ministry of Statistics and Project Implementation (MOSPI) due to delay in implementation of various central government sponsored projects the escalation cost component alone in stalled and delayed projects which was Rs. 52,445 Crores in May, 2012 has increased to Rs. 330,243 Crores in March, 2019!
Mobilisation of long term capital through derivative gold bond scheme will be an ideal funding option for these stalled and delayed projects which in turn can kick start the economy, provide huge employment to construction workers, propel the demand for steel, cement and other construction material that will certainly lead to a positive multiplier effect in the economy which is the critical need of the hour.
Hope the government will look into this suggestion and act on it swiftly.
(Featured image for representational purpose- Source)
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