Much has been said about gold in the recent past - India’s almost unwavering demand for gold, the impact it has on our import bill, the impact it has on our current account deficit and why India needs a gold policy. Yet, no one can deny that India’s largest untapped potential is gold. The affinity to the yellow metal has not waned over generations. On the contrary, deep-rooted socio-economic traditions have made the Indian society a unique example of gold consumption and investment. Gold has become one of the few assets that everyone, irrespective of social, economic, financial and literacy levels, understands. Through generations gold has remained an obvious and natural choice of saving. The fact that the shiny metal has rarely seen any depreciation in value has only reinforced this choice. This is why India has amassed a vast reserve of domestically held gold over decades. It is also for this precise reason why the Pradhan Mantri Jan-Dhan Yojana (PMJDY) should incorporate gold-backed savings and investment products in its basket of features.

The PMJDY has been designed as a comprehensive financial inclusion scheme which aims to open at least one bank account for every household in the country. To achieve this goal, over 77,000 camps were held all across India to open bank accounts. PMJDY accounts are zero-balance accounts that also offer a free RuPay debit card that can be used at various ATMs and retail outlets. Additionally, an accident insurance cover of '1,00,000 and a life insurance cover of '30,000 was also provided for those who opened their bank accounts before January 26, 2015. Further, it also offered account holders an overdraft facility if they were regular users of their bank account. The PMJDY has managed to bundle multiple savings and investment products into one account with the aim to provide an incentive to transact using the bank account. 

There is little doubt that the PMJDY is an ambitious plan that adopts a more holistic approach to financial inclusion that aims to not only increase access to financial services, but also to increase use of these services. The earlier financial inclusion plan of opening no-frills accounts failed to facilitate regular use of the account. As a result, most of the opened accounts remain dormant. Unfortunately, PMJDY cannot boast of contrary results either. Current statistics indicate that nearly 150 million accounts have been opened till March 31, 2015 under PMJDY, of which 87 million are from urban areas while 59 million are from rural areas. Sadly, the preponderance of accounts with zero balance is a staggering 85 million!

There are two central reasons to why the financial inclusion programme in India has not taken off at the anticipated rate. One, the most common complaint is that of livelihood: if one does not have money, how does one really save? Two, as financial literacy is still at a nascent stage the financially excluded have a difficult time comprehending basic banking, much less savings and investment products. The only exception to this is gold. Anecdotal evidence suggests that nearly every household almost buys some amount of gold, typically by accumulating small quantities over a period of time. The discipline and perseverance that low-income groups exhibit in setting aside money for buying gold, possibly because of social compulsions, is noteworthy. This is probably why gold-related products have worked very well in rural India. The India


Post gold retail programme and the gold-linked microfinance scheme are both cases in point.

The gold retail programme was a pilot project started by India Post, World Gold Council (WGC) and Reliance Money to sell certified small grammage gold coins through a network of 100 India Post outlets in four states (Delhi, Maharashtra, Tamil Nadu and Gujarat). This project managed to reach a scale of 700 post offices across India by the year 2010. This scheme was discontinued when the government banned the sale of gold coins. The gold-linked microfinance scheme was aimed at penetrating rural markets which lack access to formal financial services. WGC launched several schemes in collaboration with Muthoot Pappachan Group, Kshetriya Gramin Financial Services (KGFS) of IFMR and Mimo Finance of Mimoza Enterprise Finance Pvt Ltd.

The success of such initiatives reflects a positive sentiment in favour of gold investment products in recent years. The key lies in being able to design financial products, with gold-like qualities, to replace the physical purchase of gold and channel it through the formal financial system. In the recent budget, the government has announced gold monetising schemes. While none of them have been created as a tool to accelerate financial inclusion, it is the opinion of the authors that gold can be that asset class which will incentivise the financially excluded to become part of the formal system. This can be done with the introduction of the gold savings account.

A gold savings account is one in which customers can have gold grams credited into their account by paying the bank the current price for the gold. The purchased gold will not be physical gold but notional credit. The mechanics of this product are simple. The bank opens a gold savings account that is linked to the PMJDY account. Every account holder could set their gold accumulation target with a cap of 15-20g. Every month or whenever possible, the account holder saves small quantities of money in return for gold credits that accumulate. When the target is reached, they can either withdraw it as cash, as gold coin, take a gold certificate that can be redeemed at jewellery stores or transfer the credits into a gold deposit account from which any interest earned can be transferred into the PMJDY account. Gold credits can also act as secured collateral for credit, much like gold loans.

Financial inclusion has not worked that effectively in rural India largely because the focus has been in introducing financial products and practices that are alien to their ecosystems. On the contrary, microfinance institutions and self-help groups have had greater success because they work from within an ecosystem and bring about the change from within. Creating access is but the first step. The true benchmark of financial inclusion lies in measuring account activity and financial literacy. It is time to consider sagacious models of financial inclusion for greater reach and better engagement. A financial ecosystem around gold will habitually and inevitably bring about financial literacy and financial inclusion.

Soundararajan is head of research & senior fellow, Pahle India Foundation. Goswami is senior research associate, Pahle India Foundation. The views expressed are personal.

(The column appears in the June 1-15, 2015 issue)