D Sampath Kumar

Putting gold to work for common good

D SAMPATHKUMAR | Updated on January 17, 2018

All that glitter It’s money that can work

The Government must come up with a gold loan scheme with lucrative incentives; it can make the economy shine

For every rupee of fresh equity raised in the market, close to ₹18 change hands from one owner to another at the country’s two premier stock exchanges, the NSE and the BSE (SEBI Bulletin, June 2016). Every 1.2 new automobiles put on the roads in the country result in an existing car changing hands (secondary market in automobiles) from the current owner to a new owner. Even currency in circulation gets flipped roughly eight times over, to generate a larger volume of money stock (M3).

But so little of existing gold gets redeemed for cash or exchanged for a piece of jewellery made from newly minted gold. At least that would seem to be the case if a recent survey of consumer behaviour commissioned by the World Gold Council is anything to go by. This survey points out that of the 13,000 odd people surveyed, nearly 70 per cent of them claimed that they had never once exchanged or reset or redesigned or sold gold.

Pledging for good

It is true that a good chunk of fresh gold purchases constitutes a permanent stash for the ultra-rich or a store of value for someone’s ill-gotten wealth and thus is immune to triggering any kind of secondary market activity. But that cannot completely explain the near total absence of such activity given that there is a large retail base of private ownership of this precious metal.

It must indeed be an extremely poor household that cannot lay claim to owning even a few grammes of gold. On the other hand, a vast majority of households that own gold, do go through temporary mismatches in the inflow and outflow of cash that must in part at least be bridged by pledging gold. And indeed, they do if the growth of non-banking finance companies specialising in gold loan business is anything to go by.

But the question to be asked is this: Is this the most cost-efficient way to tide over temporary monetary difficulties? Thankfully, that is beginning to change even if only ever so slightly. This newspaper ran a story the other day where a marketing company in association with a leading jeweller in Chennai is offering cash against gold that mimics an operating lease in a gold ornament albeit with a difference (‘An interest-free gold loan that’s catching the eye’, August 16).

How it works

The way the scheme works is somewhat on these lines. You go to a jeweller and offer a piece of gold jewellery. He ascertains the gold content and offers 70 per cent of the current market value of that gold as cash. The amount given out as cash against the deposit of gold is then expected to be repaid in equated monthly instalments over an extended period lasting anywhere between one year to five years.

At the end of the deposit period you get to purchase from the jeweller, a new piece of jewellery for the same quantity of gold as was initially deposited. What is in it for the jeweller? Effectively he gets to keep the quantity of gold thus deposited and use it as his working capital in his business for the duration of the deposit Since the jeweller also gives 70 per cent of the market value as cash and is gradually repaid by the depositor, effectively the jeweller locks up cash equivalent to 35 per cent of the market value of gold offered as deposit over a five year period.

The opportunity cost of this money is an outgo to that will have to be set off against the opportunity cost of raising an equivalent quantity of gold from the banking sector. Since this not always possible, the jeweller ends up operating below his full potential. To the extent the larger working capital means more turnover and hence, more profits the jeweller too gains from the exchange.

There is another source of gain for him. Raising a loan from the bank to source gold means having to pay for such gold, at the international prices. Since the domestic market is currently trading at a discount to the imported gold by roughly three per cent any quantity of gold that is raised from the domestic market results in an equivalent percentage of savings in operating costs.

More gains

The national economy too gains in that for every gram of recycled gold used to satisfy fresh demand for gold, there is a reduction in the quantity of gold that would have been imported saving thereby, precious foreign exchange. Since savings in foreign exchange has immense social benefit the Government must do everything in its power to give a leg up to the process of recycling domestic gold hoard.

This is all the more relevant considering that the current gold monetisation scheme hasn’t attracted much retail interest. It is not difficult to see why the current scheme hasn’t taken off among the retail segment. Besides the temple hoard of gold, the scheme is targeted primarily at those who have surplus gold jewellery but otherwise are in no monetary difficulty or financial compulsion to convert it into cash. But there is a larger addressable market of people with some gold jewellery but are in need to raise cash from time to time for meeting some emergent expenditure.

If the terms are right, they may not be averse to letting the lender melt the gold as long as they get the equivalent quantity of gold when the loan is repaid. It is somewhat analogous to a depositor of cash in a bank being indifferent to whether he is getting paid back by the bank with the same currency serial numbers with which the initial deposit was made, when he comes back to withdraw the amount.

Moreover, under the present system the jewellery remains idle in a vault of the gold loan finance company or a pawn broker. There is a strong case for the Government to come up with a modified scheme with even greater incentive than the one that the private trade has come up with in Chennai, recently. For instance, STC or MMTC can be designated as the nodal agency for the scheme and they can enlist jewellers and gold loan finance companies as franchisees to mobiles the jewellery that gets pledged for meeting temporary cash needs. A properly designed advertising campaign can persuade borrowers against the pledge of gold and opt instead for a recycling scheme.

Of course, the scheme would require a robust management information system with real time information flow on gold mobilised with appropriate safeguards in the design of such a system. But that is not an impossible task if there is a will to do it.

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Published on August 22, 2016
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