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Gold: A new investment opportunity

May 22, 2000

Gold seems to have acquired a gilt edge. All of a sudden, the commodity has turned from an illiquid, non-tradable block of yellow metal into a liquid stock, which can also be traded in the government securities market as bonds. The scheme launched by our finance minister Yashwant Sinha way back in 1999 to monetise over 12,000 tonnes of gold reserves lying idle in the Indian household sector has gained momentum in the last few months. State Bank of India (SBI), India’s largest nationalized bank with over 8,000 branches throughout the country, has managed to mop up over 4,000 kilos of gold through its gold deposit scheme in the last five months since its launch. Last November, the scheme was launched by SBI with lot of hype and hoopla. According to top officials at SBI, the bank has, in a span of over five months, managed to launch the scheme at 17 centers throughout the country. “Our objective is to spread the scheme in over 40 centers by fiscal 2001.

As compared to SBI, Corporation Bank which has a much cleaner balance sheet in terms of its non performing assets (NPA) which is around 4 per cent (the lowest among all the nationalized banks except Oriental Bank of Commerce) launched its gold linked deposit scheme early this year. The bank has so far managed to garner over 250 kilos of gold under the scheme. “The fact that investors have started looking at gold as a tradable retail instrument is quite clear from the fact that the scheme offered by both the banks have successfully managed to mop up around 4,500 tonnes of gold in a span of couple of months,” said an official from Corporation Bank. So far only two banks have launched their gold deposit scheme---State Bank of India (SBI) and Cooperation Bank. Allahabad bank, Canara Bank and Bank of Baroda (BoB) are in the process of launching the deposit scheme.

The gold bond scheme offered by SBI is a transferable fixed deposit scheme, which also offers rupee loans to deposit holders. This scheme is an open-ended scheme having a minimum maturity period of three years. For a three year period, the bank will offer an interest rate of 3 per cent, 3.25 per cent for a maturity period of four years, 3.5 per cent for five years, 3.75 per cent for six years and 4 per cent for seven year. The scheme also offers premature withdrawal facility to deposit holders. The scheme is transferable by endorsement and delivery and offers repayment in the form of cash or gold.

Corporation Bank, the only bank which has been able to maintain its non performing assets (NPA) below 5 per cent, jumped into the bandwagon with its gold deposit scheme -- `CorpGold’ early this year. It has mopped up over 250 kilos of gold through the scheme so far. The bank's target is to mop up over 25 tonnes of gold by the fiscal 2001. The rate of return on the gold deposit offered by Corporation Bank is in line with the rates offered by SBI. So out of the two banks, which is the best bet?

Although SBI has a much wider reach as against Corporation Bank, in terms of its brand name and branch network, the later has an extremely aggressive treasury desk, which is an asset to the bank. Now it remains to be seen if Corporation Bank or any other bank can give India’s largest public sectors bank--SBI, a run for its money.

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