New Delhi: Interest rates are expected to be the key to the success of the gold monetization scheme in its new avatar, the draft guidelines for which were released by the government on Tuesday.

Though the government has taken a positive step by reducing the minimum quantity for gold monetization from 500 grams to 30 grams, industry officials point out that the interest rate on these deposits will be the key.

Finance minister Arun Jaitley, in his budget speech, had announced the introduction of a gold monetization scheme to replace the 1999 gold deposit scheme and gold metal loan scheme, which were not popular among consumers. India is one of the world’s largest consumers of gold, importing as much as 800-1,000 tonnes every year, forcing the government to levy high import duties and putting other restrictions on gold imports.

According to the draft, banks will be free to decide the rate they want to offer on the scheme. Keyur Shah, chief executive officer of Muthoot Exim, said the success of the scheme will depend on the interest rate.

“The 1999 scheme offered an interest rate of 0.75-1% and flopped. For this scheme to take off, interest rates will have to be attractive," he said. “But banks will be facing commercial restrictions. Typically, the gold leasing rate is around 3-5%. Assuming that banks want a margin of 1-2%, the interest on gold deposits is likely to be only around 1-1.5% on the lower side," he said.

He added that ideally banks should link the deposit rates to the leasing rates so that an increase in the leasing rates benefits depositors.

Somasundaram PR, managing director, India, World Gold Council, said once the incentive framework falls into place to the satisfaction of the customers and banks, the scheme will help gold become a fungible asset and benefit the economy.

Among measures proposed to make the scheme more attractive, the government is considering offering customers tax incentives, including tax-free interest on gold deposits, according to the draft guidelines.

As an incentive, banks will be allowed to use these deposits to meet their requirements for statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements. SLR is the proportion of deposits that banks must invest in government securities and CRR is the proportion of deposits they must hold with the central bank.

Banks will also be permitted to sell the gold to generate forex reserves, which can be used by them for lending to exporters and importers. They can also trade on commodity exchanges or sell the gold to jewellers.

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