Private Banks Get A Wider Shot At Capturing Government Business

The central government on Wednesday decided to widen the scope for private banks to undertake government business. While some private banks already had a share of government business, it was limited to a few large lenders.

“All banks can now participate. Private banks can now be equal partners in development of Indian economy, furthering government's social sector initiatives, and enhancing customer convenience,” the office of Finance Minister Nirmala Sitharaman said in a tweet.

Embargo lifted on grant of Govt business to private banks. All banks can now participate. Private banks can now be equal partners in development of the Indian economy, furthering Govt's social sector initiatives, and enhancing customer convenience. @FinMinIndia @DFS_India

At present, state-owned banks and a few private banks are eligible to conduct central and state government business. The business includes collecting revenues and disbursing payments under various government schemes.

The Government has lifted the embargo on private sector banks (only a few were permitted earlier) for the conduct of Government-related banking transactions such as taxes and other revenue payment facilities, pension payments, small savings schemes, etc.

Government of India Press Release

In 2012, the RBI had allowed private sector banks to act as agency banks to undertake Government business. That move though was reversed in September 2012, on account of a central government decision taken “at the level of the Finance Minister” to “postpone the “liberalisation of government business in favour of private sector banks” for a period of three years. This was disclosed in a communication dated April 2015.

As per that 2015 communication by the central government, it had been decided to continue with the embargo till the time the RBI conducted a “complete review of the functioning of the private banks”.

The document states that, while reviewing its policy in 2012, the RBI had stated that the move to allow private sector banks to handle government business was taken “with a view to enhancing the quality of customer service in government business through more competition, improving customer convenience by increasing the number of customer service outlets and broad basing the revenue collection and payments mechanism of Governments”.

Private Banks Get A New Shot At ‘Government Float'

Tax collections, pension payments, defence transactions and payments can now also flow through all private banks, explained VG Kannan, former chief executive officer of the Indian Banks Association. Earlier only public sector banks and the top three private banks were permitted to do this, he said. The potential business could run into a few lakh crore, he said.

Uday Kotak, chief executive officer of Kotak Mahindra Bank also welcomed the move.

I welcome this progressive reform. It will enable the banking sector to serve customers better. Private and public sector must both work towards sustainable development of India.@nsitharaman https://t.co/Xaw9IPrEe4

While the profit margins on government business are wafer thin, private banks will be able to take advantage of the significant float that comes from government accounts and schemes, said a banking analyst, speaking on condition of anonymity. The ‘float' is a term used to refer to the money held by the banking system between the time when a transfer is made into a depositor's account, till that money is withdrawn.

However, a retired public sector bank official who spoke on condition of anonymity, said the opportunity in ‘government float' is not as large as it may appear since there are strict timelines within which funds for government schemes have to be transferred to individual accounts. There is a limit to the fee that banks can earn on this business as well.

The total size of commission paid to agency banks is approximately Rs 3,880 crore and it has remained stagnant for the past four years, said Dhananjay Sinha, head of institutional research at Systematix Group. Therefore, the degree of impact isn't substantial. Nonetheless, it is positive for large private banks like Axis Bank, HDFC Bank and ICICI Bank in a medium-to-long time frame, he said. Directionally, the decision is going to be negative for PSBs over a period of time, he added.

Would private banks satisfy themselves merely with fees/commission? Government sector's ownership in total deposits, current account deposits, savings account deposits were at 8.4%, 10%, 8.2% respectively as on end-March'20. This would be another large opportunity for private banks. PSBs market share in government deposit is ~80%.

Dhananjay Sinha, Head-Institutional Research, Systematix Group

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