India will allow citizens to deposit gold with banks to earn interest as the world’s second-biggest consumer seeks to cut reliance on imports by tapping idle bullion lying with households.

Individuals and institutions can deposit a minimum of 30 grams in the form of bullion or jewelry under a so-called gold monetization scheme, according to a draft document released by the government on Tuesday. The banks can set the interest rate on the deposits and the metal mobilized may be loaned to jewelers, the government said.

Success in drawing out a part of the more than 20,000 metric tons of gold lying with households and institutions like temples may help India lower dependence on imports and ease pressure on the current-account deficit. While the plan proposes to ensure steady supply of bullion to jewelers, banks may benefit from a new business in a country where gold is bought during festivals and marriages as part of the bridal trousseau or given as a gifts in the form of ornaments.

“A lot of households have scrap and broken jewelry with them and the new scheme should help them to deposit their stocks with the banks and get easy money,” Prithviraj Kothari, vice president of the India Bullion and Jewellers Association Ltd., said by phone from Mumbai. “The interest rates offered should be more than 3 percent to make Indians part with their gold.”

Import Curbs

Finance Minister Arun Jaitley in February first announced the monetization plan in his annual budget speech on Feb. 28. The public have until June 2 to send comments and feedback on the draft rules, the government said.

A record current-account deficit, that sent the rupee to an all-time low, forced India to raise the import tax on gold three times in 2013 to 10 percent and link inbound shipments to re-exports. The restrictions were withdrawn in November after the deficit narrowed.

Imports are rebounding and the South Asian nation is set to become the world’s top consumer this year as economic growth accelerates and China’s booming equity markets reduce the appeal of the precious metal, according to the World Gold Council. Demand will rise to between 900 tons and 1,000 tons this year, the council estimates.

The monetization plan will be limited to select cities initially as it requires a vast set-up of infrastructure for secure handling of gold, according to the draft plan. Customers will have the option of redeeming deposits either in cash or in gold with a minimum tenure of one year. Investors may be exempted from paying capital gains tax, wealth tax and income tax, the draft showed.

‘Trapped Wealth’

While the plan will help release wealth that is “trapped” in physical gold holdings into the economy, it faces the challenge of persuading people to part with gold, UBS AG analysts Edel Tully and Joni Teves said in a report on May 15. “Unless there is a fundamental change in attitudes towards gold and gold jewelry, the scheme could potentially attract only a subset of gold holdings such as scrap or unusable gold and investment-type products like bars and coins,” they wrote.

Under the plan, banks may also sell the gold mobilized to generate foreign currency for lending to exporters or importers. The banks may trade on domestic commodity exchanges where mobilized gold can be delivered and may be allowed to deposit the metal with the Reserve Bank of India as part of their mandatory cash reserve and statutory liquidity ratio requirements, according to the draft rules.

A gold deposit plan run by the State bank of India since 1999 managed to draw just 15 tons because of a requirement to deposit a minimum 500 grams and low interest rates of 0.75 percent to 1 percent, according to UBS.

“Whatever shape and form the scheme will take, there are bound to be many implementation risks,” UBS said. “Creating a wide network of collection points by tapping into jewelers and other retailers is a step in the right direction in terms of expanding the scheme’s reach, but is likely going to be challenging.”