Why did it take so long for the government to conclude the efficiency gains that will arise from allowing private banks to handle government transaction business?
The government’s approach has so far been two steps forward and one step back. So far the government had allowed only the big private banks to be engaged with it on this front. But now it’s not just the big private banks, even several regional ones are expected to benefit from this move.
Opening a new stream
This move should be seen more as opening a new stream for mid-sized private banks (regional players) such as Bandhan Bank or Federal Bank that have a strong liability franchise in their core markets, although the large private banks (Axis Bank, ICICI Bank, HDFC Bank) are going to be the prime beneficiaries, according to industry observers.
Top private banks such as Axis Bank, ICICI Bank and HDFC Bank already have a foot in the door as they are eligible to conduct Central and State government business (collection of tax revenues and making payments under various government schemes).
It may be recalled that an embargo (not a direct one) was introduced a few years back. In the backdrop of angst expressed by public sector banks over private sector banks doing little in social banking and distribution of Jan Dhan accounts, the government was compelled to introduce an advisory, which was seen as an embargo. But now things have come a full circle, with the government going all out to support the growth of private sector banks.
Bankers thrilled
Soon after the formal announcement came on the Twitter handle of the office of Finance Minister Nirmala Sitharaman on Wednesday, several honchos of private sector banks were thrilled. Uday Kotak, Vice-Chairman and Managing Director, Kotak Mahindra Bank, tweeted: “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”.
Rajiv Anand, Executive Director, Wholesale Banking, Axis Bank, said: “Axis Bank has a deep relationship with various Central and State governments. We at Axis Bank are delighted with the announcement. We will bring the best of technology to serve the nation.”
While private banks now have reason to smile, this does not mean curtains for large public sector banks such as State Bank of India. Going by SBI’s share of fees and growth rates in recent years, the country’s largest commercial bank would be able to defend their market share, said a report by Kotak Institutional Equities.
So, what do all private banks get in this latest government move? The positive aspects for private banks are better access to deposits through float and fee income streams for the activities undertaken on behalf of the government.
One must remember that big private banks have been operating with the government, and this is reflected in the market share of deposits that they have from the government. One thing is for sure – government balances have been moving from public sector banks to private banks. However, households continue to prefer public sector banks. The share of government deposits with public sector banks have fallen from 90.2 per cent in March-end 2014 to 76.3 per cent in March-end 2020. On the other hand, the share of government deposits with private banks has increased from 7.4 per cent in March-end 2014 to 21.8 per cent in March-end 2020. So, the direction is quite clear and the latest move is only expected to accelerate this trend.
The latest reform is not going to yield immediate returns for private sector banks as public sector banks are going to step up measures to defend their source of business.