Interest on gold deposits may be exempt from tax

Gold monetisation scheme favours allowing banks to use deposits as reserves

The government has proposed exempting interest earned on gold deposits from income tax, wealth tax or capital gains tax.

It is examining the option of allowing banks to use gold deposited under the monetisation scheme announced in the Budget as a part of their cash reserve and statutory liquidity.

Apart from these incentives, the draft gold monetisation scheme announced on Tuesday sought to rope in small investors by lowering the minimum gold that can be deposited to 30g from 500g in the existing gold deposit scheme.

The finance ministry has sought comments on the draft scheme from stakeholders by June 2.

While the scheme has left the decision of interest rates to banks, experts said it could be around one per cent. Both the principal and interest to be paid to depositors will be valued in gold. If a customer deposits 100g of gold and receives one per cent interest, he has a credit of 101g after a year.

Depositors will also have the option to receive gold on maturity, but they have to decide at the time of depositing.

Banks have been given various options for using the gold collected, including selling to generate foreign currency, selling coins to customers and lending to jewellers. However, banks will also be allowed to buy and sell on domestic commodity exchanges, where mobilised gold can be delivered.

Such options aren’t available to banks in the existing deposit scheme. Experts said the options were designed as incentives for banks to pay a higher rate of interest to depositors.

The government said initially, the scheme would be launched in select cities. Over time, as the infrastructure for assaying and refining gold develops, it could be extended to other cities.

“This draft reflects a practical approach. Once the incentive framework falls into place to the satisfaction of banks, customers and others, we will have a uniquely Indian scheme that allows gold to become a dynamic, fungible asset in the hands of gold savers, with significant benefits to the economy,” said Somasundaram PR, managing director, India, World Gold Council.

The scheme is aimed at mobilising idle gold held by households and institutions, providing a fillip to the gems and jewellery sector, and reducing reliance on import of gold. The draft proposes 350 hallmarking centres for initial purity tests. Later, gold brought by customers will be melted there.

With the reduction in the volatility in gold prices, lenders are expecting this year to be better than the last in terms of the gold loan business.

Last year, with the price of the yellow metal fluctuating, lenders had begun to cautiously monitor the gold loan portfolio, taking a calibrated approach to growing it. However, this year, gold prices have more or less been broadly in the range of ~26,500-27,500 for 10g, giving banks the confidence to grow their gold loan books.

Though globally there has been some volatility in prices, it hasn’t had an effect on the domestic market due to the depreciating rupee.

In calendar year 2014, gold prices had fluctuated widely between ~27,000-30,000 for 10g, thus making lenders cautious about growing their books.

“We are 100 per cent sure that this year will be better than last year as far as gold loans are concerned. We are looking at 25-30 per cent growth this year and we are almost on track for that,” said a banker at HDFC Bank.

Earlier, gold loans were typically available only for a short duration of one year but recently HDFC Bank has extended the tenure to up to three years.

Since gold loans are secured in nature, the rate of interest at which they are offered are cheaper than unsecured products such as personal loans. For instance, gold loans from banks are typically available at the interest rate of 12.5-14 per cent as compared to personal loans which are at a rate of 15-20 per cent.It is not just banks but even non-banking financial institutions (NBFCs) expect the gold loan business to be better this year.

S Kannan, executive vice-president, Muthoot Fincorp, said it is not just growth but even the recovering from existing borrowers will also improve due to the stability in prices. This is because when the gold prices go down, the propensity to redeem the loan by the customers also goes down.

Apart from the stable prices, lenders are also aggressively advertising about gold loans and positioning it as a cheaper borrowing option in order to attract consumers.

“The unorganised market is estimated to be four times larger than the organised market due to which there are opportunities and as a result we have been trying out to reach to that section of consumers. Earlier, the focus was more on walk-in customers but now we are trying to reach out via campaigns and advertisements etc,” said Kapil Krishan, chief financial officer, Manappuram Finance.