It is estimated that 20,000 tonnes of physical gold is being held by households and temples in India. However, GMS only attracted 900kg of gold as of 20 January 2015. Banks and consumers received the scheme coldly.
GMS encourages consumers to deposit gold jewellery, bars, and coins with banks by o?ering interest with the return of gold in the form of bars at the end of the deposit term. The initial failure of the scheme means Modi failed to change the Indian belief of holding physical gold as a form of financial security with cultural signi?cance.
Following this lukewarm response to GMS, RBI has announced that the government will pay banks a total commission of 2.5% for the first year to incentivise their participation in popularising the scheme. This commission includes 1.5% for handling charges, and is expected to encourage crucial support as similar programs failed in the past as a result of negligible returns for banks.
Will the scheme become success after the amendments? Allocated Bullion Solutions (ABS) has answer for this. ABS analyses the GMS in its latest report:
Following the latest amendment to the GMS in January, consumers will continue to earn 2.25%p.a. interest for a medium-term deposit of 5-7 years with a lock-in period of 3 years, while a long-term deposit of 12-15 years earns 2.50%p.a. and relates to a lock-in period of 5 years.
ABS says while banks may now be more incentivised to promote the GMS given they will be compensated with commission, these interest rates are likely to remain too low for consumers to take part on a meaningful scale.
Need For Further Amendments
Indian government and the RBI will be happy to adjust the Scheme to facilitate the success of this program.
RBI has said the “Scheme will be reviewed regularly based on feedback so as to address any implementation issue and to make it more customer friendly”.
ABS believe that further amendments to the GMS are necessary, particularly in relation to interest rate returns. “We expect the public response to remain modest until then.”