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Domestic monetisation efforts due for a revamp
Exactly how much gold India has accumulated over the years is a matter of much speculation. Considering the $340-billion worth of gold imported in the current decade itself, the total number should easily be worth over a trillion dollars. In 2013, a surge in gold imports aggravated India’s current account deficit, and revived interest in mobilisation of domestic gold to reduce imports. The existing Gold Deposit Scheme (1999) and the Gold Metal Loan Scheme (1998) were found ineffective, and so the Gold Monetisation Scheme (GMS) was launched in 2015 to increase mobilisation of domestic gold. However, the response since has been tepid, calling for a fresh look.
Here is one way to revive the flagging GMS: Allow gold loan providers (banks and NBFCs) to participate in the GMS through the gold pledged with them in default accounts. Currently, gold loan financiers are required to auction this jewellery on an “as-is-where-is” basis. Melting jewellery to determine purity is not permitted. Consequently, bidders at auctions exercise undue caution and bid lower than the real value of the jewellery (classic lemon market/asymmetry of information). Borrowers lose because their jewellery gets sold for less than market value, and with the GST also payable, the auction surplus, which otherwise comes back to them, is often wiped out.
If gold loan providers are allowed to deposit into the GMS collateral gold held against accounts in default, it would be a win-win for all. The actual value of the customer’s gold jewellery will be independently assessed by a credible third party upon melting at any authorised collection and purity testing centre, without extra cost or tax. The financiers will gain from lower operating costs and timely realisation. And the GMS, which has mobilised only about 15 tonnes of gold since 2015 (less than what the three largest gold loan NBFCs auction in a year), gains from volumes.