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Wednesday, May 29, 2019

Gold and Silver Monetization: A Productive Use of Households Idle Assets

1.      Background
Nepal is historically a consumer of gold and silver of the world gold market. The demand for gold and silvers are entirely met through import and it is not domestically produced. It is also a one of the commodities which played major role in rising trade deficit and to deteriorate the current accounts balance of the country. Nepal Rastra Bank (NRB) has imposed a quota on gold imports and demand for gold is rising year after year. As gold price has secular rising trend, Nepal is paying significant foreign exchange reserve for the import of Gold. Therefore gold and silver has become major component of import, expenses on it also affects liquidity condition of the banking system.
Globally, the demand for gold and silvers are increasing because it has multiple uses as a jewelry, finance and investment, medical use for dentistry, electronic devices and cell phone, aeroplanes and space vehicles, medals and rewards.  The central banks and governments also hold gold as reserve assets in the monetary system. In an uncertain economic condition, gold can be used as an investment asset to avoid financial risks. It is also a high esteemed precious metal and it is used for coins, crowns, awards and religious statues. Mainly, the demand for gold is high as it is accepted as safe assets for investment.
Nepalese people invest on gold and silver with significant amounts. However, these investments are not streamlined within the financial system and gold and silvers are like under the mattress savings. In Nepal, the gold and silver demand is driven by the socio-economic, cultural, religious, jewelry and ornaments factors. Nepal is not a producer of gold and silvers, thus its demand is met by imports. The gold and silvers purchased and kept as idle assets by the households can be brought under the financial system through gold monetization scheme. Thus, this article explains how the “gold deposit policy” can be implemented to utilize huge amount of gold and silver idley held by Nepalese households.
2.      Import and Stock of Gold and Silver
The gold and silver import is gradually increasing in Nepal year by year. The spending of foreign exchange reserves on gold and silver shares about 3 percent of total import of Nepal.  In 2003/04, the gold import was Rs. 0.1 billion which increased to Rs. 41 billion in 2009/10.   The figure increased to Rs. 32.2 billion in 2017/18. The total figure of gold and silver import is Rs. 325.5 billion during the period of 2003/04 to 2018/19.   In addition, there are the evidences of significant amount of illegal import of gold and silvers in Nepal. The illegal import of gold and silvers is hugely draining up remittances to pay the illegal import. Thus, the gold monetization scheme helps to discourage the illegal markets of gold and silver in Nepal.
3.      Current Use of Gold in Nepali Households
Gold is more than an investment to Nepalese people, it is a culturally significant metal which has found a place in every social and cultural ceremony in Nepal. Gold and silver is an integral part of religious ceremonies in Nepal. It is common for people to purchase gold at different religious occasions. Gold and silver jewelry and ornaments are passed on from generation to generation, it passes from one generation to another also helps people save money on gold, avoiding its rising prices. The gold has become symbol of power, people feel financially strong those who hold more gold. Gold has been considered the safest investment, owning gold and silver is considered an extremely smart choice. The fluctuation gold price everyday makes sense to invest in gold for a secure future.
Use of Gold in Nepal


Gold Import

Gold Buyer
Or
Households

Use as Collateral for Loan

Keep as an Idle Asset

Use for Ornament
Currently, in Nepal people have two options to hold gold and silver: they use it as collateral for credit or they keep it as idle assets and use it for ornaments or jewelry. The gold and silver used as collateral or credit is Rs. 38. 07 billion in end of the fiscal year 2017/18, it covers only 12 percent total imported gold since 2003/04. The gold and silver held by people either is kept at home without any security or they store it in bank lockers by paying a maintenance fee. Gold and silver holding with such a way is riskier or costlier. However, with the implementation gold monetization scheme, people have one more choices to keep gold in the form of gold and silver deposit at banks and simultaneously earn interest from it.
4.      Policy Framework for Gold and Silver Monetization Scheme
Monetization is a process of converting a commodity into domestic currency, in Nepalese rupee. Gold and silver monetization refers to unlocking the value of gold and silver in terms of Nepalese rupee. The Gold Monetization Scheme refers to a process wherein a depositor deposits gold and silver (say jewelry, bars, coin, etc.) in the bank. This can work as a normal banking operation like a savings bank account, but it is accepted in terms of gold or silver instead of in Nepalese rupee.
The principle of deposit can be accepted in gold or silver (which are valued Nepalese rupee) and interest can be denominated in Nepalese rupees. The central bank can provide a guideline for determining the value of gold or silver which can be accepted as deposit. The banks can determine the value or price of gold that can be used as deposit and be tied with reference to the fluctuation of gold price in the international market. The central bank can fix the minimum lock-in period of gold deposit and rule for penalty on early or pre mature withdrawal. Similarly, the certificate of deposit issued to the customer by banks should be made liquid and which can be used as collateral if loan is needed to the customer against such gold deposit certificate.
The scheme for gold deposit should be backed with four arrangements by the central bank to the banks: (i) withdraw loan from central bank equal amount of deposit (ii) allowed to receive a fixed period loan from other banks (iii) allowed to count in capital and credit to deposit ratio (CCD) ratio (iv) and allowed to count in statutory liquidity ratio (SLR) and cash reserve ratio (CRR).
5.     

Gold
Traders

Gold Import

Gold Buyer
or Households

Use as Collateral for Loan

Keep as an Idle Asset

Use for Ornament

Deposit in Banks and Earn Interest

Use as Collateral for Loan from the Central Bank

Use as Collateral for Loan from Other BFIs


Banks

Count in CD Ratio and Liquidity Ratio


Policy Support
Support and Benefits of the Scheme
The central bank should design a policy to support the banks to participate the gold deposit scheme. The banks can take approval to implement the scheme. The banks which were allowed to join the scheme can announce the customer to deposit minimum quantity of physical gold. The banks can build up an internal or outsourced mechanism to ascertain the quality and quantity of physical gold. The deposit should be interest bearing and fixed period maturity and can be allowed to short, medium and long term deposits. The minimum period for deposit should be three months and maximum period should be ten years within which the banks can be allowed to design their scheme.

Policy Support for Gold Monetization in Nepal
The gold deposit policy is monetization of gold through gold saving accounts. Currently, people have two options (i) they keep their gold without any security at home or (ii) they can store it in bank lockers by paying a maintenance fee. However, with the implementation of such scheme, people have one more choice to keep gold in the form of gold deposit facility and earn interest. The main benefit of the scheme is to attract in gold instead of gems and diamonds. Peoples holding coins and bars can earn interest generally an appreciation of value. The gold and silvers will be securely kept by the banks.  For a gold product that usually remains idle in homes and lockers, this will earn the households between 4 percent to 10 percent interest depending on the period of deposit and market condition. Short-term deposit rates can be allowed to decide by the banks while long-term deposit interest rates can be decided by the central bank.
Nepalese banks are in stress of liquidity and loanable funds. The opening of gold and silver deposit account can be followed with the same rules of cash deposit account. The provision should be made to similar to the other deposit accounts like know your customer (KYC), source decleration and other identification documents. The gold and silver deposit can be treated same principles as other deposits.
The idle gold holding at home is also threat of theft for the households. Thus, gold deposit scheme can facilitate the household with locker facility with handsome interest. The interest bearing on gold and silver deposit also motivates the people to hold gold instead of holding other gems and ornaments.
6.      International Experiences
Turkey and India are the countries which are the high gold and silver demanding countries in the world.  Turkey launched the scheme in 2011, which is called ‘the golden days’. It is in order to bring gold held by the households into the financial system as savings. The aim of the program is to support both elimination of savings deficit and the banks obtaining efficient resources.
Government of India and Reserve Bank of India (RBI) issued the detailed guidelines of Gold Monetization Scheme in September 2015.  The aim of the scheme is to mobilize the gold held by households and put it into productive use; to provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks; to reduce reliance on import of gold over time to meet the domestic demand; to strengthening the reserve requirements of the Central Bank. There are three options in India for deposit the gold: short-term which is for 1-3 years (with a roll out in multiples of one year); medium-term which is for 5-7 years and long term which 12-15 years.
7.      Conclusion
The benefits gained from the arrangements of the gold and silver monetization scheme can be examined briefly in five parts. Firstly, the arrangement mobilizes the resources of the economy and support economic development. Secondly, the banks make their deposit reserve by physical gold and silvers, as a result, the risk and cost of households for holding gold and silvers decreases. Thirdly, the depositors earn definite interest in holding gold and silvers that they have not received before. The fourth benefit is the scheme can encourage people to buy gold in formal market, which in turn be helpful to collect more tax revenue. The fifth benefit of the scheme is as liquidity withdraws from banking through the import of gold is compensated by the scheme.
Thus, bringing under the mattress savings into the financial system has a great significance. These savings are not only supply of resource for economic growth but also they can have a role in solving the problem like informal markets and current account deficit of Nepal. The central bank and the government can mobilize the resources which has remained idle yet.
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References:
Ercan Ozen (2015), “A New Model in Compensation of Saving Deficit in Turkey: The Golden Days in Banking and Early Results”, Procedia Economics and Finance 23 ( 2015 ) 38 – 46, (Link: https://core.ac.uk/download/pdf/82206149.pdf)
Nepal Rastra Bank (2019), Quarterly Economic Bulletine, 2019 Mid January. https://www.nrb.org.np/red/publica.php?tp=economic_bulletin&&vw=5
Reserve Bank of India (2015), Gold Monetization Scheme, 2015, https://rbi.org.in/scripts/FS_Notification.aspx?Id=11295&Mode=0&fn=2.

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