State Bank of India (SBI) has set India's first gold deposit scheme in motion, with aim to tap the massive gold reserves in the country.
SBI is India's largest bank with assets of Rs 2,225 bn (US$ 51.4 bn). It runs the world's largest branch network of 8,900 branches. SBI controls around 22% of India's loans and deposits, and is a leading player in trade finance, forex etc. through its subsidiaries. It is also offers other financial products like mutual funds, investment banking, housing finance and factoring. It controls over 20% of the banking business in India.
Under the scheme, the first of its kind in country, individuals, corporates, trusts and Hindu Undivided Families (HUF) can deposit their gold with the bank for three to seven years. The deposited gold will command an interest rate between 3% to 4% based on the prevailing rate of gold. The depositors have the option of either taking back the same quantity of net gold that they deposited or they can encash the principal at the prevailing price at the time of the redemption. Other attributes of the scheme include an option of taking a loan up to 70% of the value of gold at an interest rate of 12% per annum.
For the depositors, the advantage of the scheme will be two folds:
They will be able to earn interest by depositing their unused gold in the banks' safe hands
More significantly, they can utilise their gold reserves to take a loan from the bank at a lower interest rate. Normally, they would have deposited their gold with the local jeweller and borrowed at a interest rate ranging between 17-24%. Also under this scheme, depositors are assured of their gold's safety.
Advantages of the scheme for SBI and the economy as a whole:
It is estimated that Indians hold around 13,000 tonnes of gold currently. The scheme will put India's gold reserves to productive use.
India consumes about a fourth of the global gold production and imports 80% of its requirements. SBI can use the gold deposited with them to bridge the domestic gold demand supply gap. The bank can sell its gold reserves in the domestic market and thereby curb gold imports in the long term and save valuable foreign exchange.
Incase the depositor opts for a loan on the gold deposited, SBI will be a net interest earner as it will pay only 3-4% on the deposits and earn 12% on the borrowings on that gold.
In a related move, SBI is also getting into assaying (testing of ingredients and quality) of gold and precious metals. The bank will form a joint venture entity, SBI Gold and Precious Metals Private Limited, to assay the jewellery. Other venture partners include Allahbad Bank, Corporation Bank, Canara Bank and London-based Credit Suisse Financial Products.
The domestic gold market is largely unorganised and hence the valuations of the gold held are sometimes not accurate. These moves will bring in greater clarity in retail bullion transactions in the country and ascertain its true worth. The move will also help integrate India's golden assets with the global bullion market.
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