Government's ambitious gold deposit scheme can succeed only if depositors are paid a higher interest rate and banks are given more regulatory exemptions, Japanese brokerage Nomura said.
"Depositors want higher interest rates, while banks want regulatory exemptions. If these are provided, then the scheme may be successful," it said.
Three days ago the government proposed a new scheme offering tax-free interest on depositing the yellow metal with banks.
Nomura warned that if the necessary leeways were not given then the scheme might become a "damp squib" like the one in 1999.
At present, banks are offering an interest of up to 1 per cent on gold deposits and the same needs to be "much higher" for the new scheme to succeed, it said.
Sounding sceptical over banks' ability to pay higher interest, it said the smaller ticket sizes of deposits will increase the transaction costs like handling, storage and transportation.
Quoting from a study, it said an interest rate of 2-3 per cent will result in the final cost for a bank going up to 6.95 per cent.
Even though the minimum cap of deposits has been reduced to 30 grams, households owning jewellery are unlikely to get encouraged as the gold has to be stored in standardised coins.
The target grouping for a bank will be households or institutions as an investment, but they account for only a third of the gold demand in the country.
But the temple trusts have traditionally not been a participant in such scheme, it said.
Among the regulatory issues for banks, it said some certainty on use the gold deposits as part of their cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements would be helpful.
Irrespective of the difficulties, it underscored that the scheme holds great benefits on the macro front, saying, it can lower gold imports by bringing into circulation domestically-held idle gold, thus helping the external balances.
Additionally, the easy availability of the precious metal can reduce costs for jewellers and increase the exports.
Seeking to mobilise idle gold worth up to Rs 60 lakh crore held by households and institutions, the government proposed a new scheme offering tax-free interest on depositing the yellow metal with banks.
The draft of gold monetisation scheme also provides for incentives to the banks. Individuals and institutions can deposit as low as 30 gms of gold, while the interest earned on it would be exempt from income tax as well as capital gains tax.