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Would you take your gold to the bank and walk out with a paper that gives you the promise to pay interest after a year? The government is hoping that you would so as to monetize some of the 20,000 tonnes of gold held by Indian households. The draft guidelines to the gold monetization scheme came out last week—you can read them here: http://mintne.ws/1F7KyD3 . The scheme works like this: you need a minimum of 30 grams of gold to participate. Let’s assume you take 100 grams of gold coins that are lying in the locker and want to deposit them. You’ll need about half a day at your disposal to complete the process—so take all the gold you don’t need and you’re happy to deposit, rather than going again and wasting another half a day. You take the gold to a hallmarking centre (your bank will tell you where it is) to certify the purity of the metal. Once you know the purity and weight, you fill a KYC (know-your-customer) form and agree to the gold getting melted. The gold will then be melted in front of you, and you can now take the gold back or deposit it and walk out with a deposit certificate with the purity and weight details on it. This certificate is taken to a bank where a gold savings account is opened and the gold deposited with the verification centre.

The bank will decide the interest you get on the gold deposit; but competition by banks may increase this beyond the indicative 1% that the government draft has used. If you deposit 100 grams gold, you get 101 grams of gold at the end of year one and 105.101 grams at the end of year five. I’m assuming that the interest is cumulative. The government draft should specify that the interest is cumulative on a deposit of a tenor more than a year—some smart banks will start giving simple interest rather than compounding the gold. Exemption of the scheme from capital gains tax and income tax is likely but has not been firmed up yet. Tax breaks are a great nudge for investors and the government should go ahead and give tax breaks if it wants to make the deal worth the effort.

Will it work? According to naysayers, since a bulk of the gold is a sump for black money, it is unlikely that the chors will come out with their hoards. Households may find the process difficult and the benefit will have to outweigh the costs of turning existing gold into a deposit. But we need to do is to look at the gold deposit scheme not in isolation but as a moving part of a larger story that is playing out in India. Indian households prefer to hoard gold not because they are stupid, but because they are underbanked. They prefer gold and real estate because they do not trust (for good reasons) financial products. Financial inclusion is now a multi-pronged strategy in India with 155.9 million accounts opened under Jan Dhan Yojana as of 13 May. The payments banks, once they are born, will transform the banking sector. Already mobile banking is changing the way people transfer money in India. On another front, work is on to increase the cost of holding gold as a black money sump by linking purchases of bars and coins worth over 1 lakh, to a permanent account number (PAN). Work is on to make financial products safer and free of deception.

Here’s my take: the fact that depositors can get their gold back and the interest is in the form of gold is straight out of the behavioural economics text book. If the price of gold falls by 5%, the 100-gram gold deposit, valued at the current price of 2.7 lakh, a year later will be worth about 2.6 lakh after the 1% interest that accrues. It has been proved the world over that human beings hate to lose and will never take a deal that has a potential for a loss. If the gold deposit scheme had stuck to just getting back money, and not gold, potential depositors may have worried about getting back less than they put in. But when the deal is getting 101 grams of gold after a year or 105.101 grams of gold after five years, the story may play out differently. The depositor will be walking out with more gold than she put in. And no matter what the market value, and that the fall has actually reduced the value of the gold, in the investor’s mind, she has walked out with more.

Here is another thing that the government can do. A third generation jeweller I spoke to about this scheme had this very commonsensical suggestion to make. Most people tend to misplace papers (the unclaimed retirement deposits of 3,000 crore is partly explained by forgotten, misplaced investments). So, the gold deposit certificate could have an attractive gold coloured border or could be printed on gold coloured paper. This will help the conversation at home when the paper is brought back and it will help in storage and recall of where it is kept. The chances that it goes right into the locker, just like gold does, are higher if there is a trigger for the brain to classify it as gold.

Before you dismiss it as trivial, think about the building societies that are able to charge a premium in India because they are named after places in the West—Rivera, Orange County, New Haven and so on. Remember that perfectly rational people exist only in textbooks.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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