Poor response takes sheen off gold bond scheme

Banks have managed to collect a paltry `150 cr under the much-hyped initiative

The primary reason for this lower-than-expected collection is the higher issue price. The RBI had set it at Rs 2,684 a gram, whereas the market price was lower. Why should somebody buy at higher price – A senior banker

Mumbai : The government’s much-touted sovereign gold bond scheme has failed to cut much ice with the public, if the final amount of about Rs 150 crore is any indication, say bankers, who also blamed the high issue price as the biggest dampener. Public sector bankers also attributed the many market holidays and affinity of the public towards physical gold for the subdued demand for ambitious sovereign gold bond scheme, which was the maiden offering by the government so far.

Although, the Reserve Bank of India (RBI) has not formally disclosed the overall funds collected under the scheme, bankers pegged it at around Rs150 crore. “The primary reason for this lower-than-expected collection is the higher issue price. The RBI had set it at Rs 2,684 a gram, whereas the market price was lower. Why should somebody buy at higher price,” said a senior banker from a state-run bank. He said his bank was targeting around Rs 50 crore from the scheme but could only collect one-tenth of it.

Market experts said a 4-5 per cent premium on the market price is not acceptable to a buyer, therefore the dismal demand. “In our country, people like to worship physical gold on Dhanteras, which is an auspicious day to buy the precious metal. We cannot resist ourselves from buying gold,” said another public sector bank official. Prime Minister Narendra Modi, on 5 November, had launched three ambitious schemes to reduce the physical demand for gold and fish out 20,000 tonnes of the precious metal worth $800 billion lying idle with households.

Modi launched the maiden sovereign gold bond, gold monetization and the Indian gold coin scheme with much fanfare. The first tranche of the sovereign gold bond scheme was open for subscription from 5-20 November. “The collection under the scheme would have been better had the government started the scheme earlier. There were a few holidays during the subscription period which has impacted the response,” said a senior official of a state-run bank.

However, some bank officials described the response as ‘reasonable’, considering this was the first time the government launched such a product. “We saw greater attraction for the bond scheme compared to the inflation-indexed bonds. There were no targets given to us by the RBI. This was aimed at seeding of the product. I think with more such issuances, the acceptance level will increase,” said an official of a large public sector bank.

Under the scheme, the bonds were denominated in the multiples of grams of gold with a basic unit of 1 gram. An individual or institution was allowed a minimum investment of 2 units or 2 grams and capped the maximum investment up to 500 grams per person per fiscal. While the bonds have an eight year tenor, an investor could exit from the fifth year on interest payment dates.

The bond bears interest rate of 2.75 per cent per annum on the amount of initial investment. Interest will be paid half yearly and the last interest will be paid on maturity along with the principal. The pricing of the bonds, which is rupee terms, is based on the basis of the previous week’s simple average closing price for gold of .999 purity, as disclosed by the India Bullion and Jewellers Association.