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.

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.

In 2012, the RBI had allowed private sector banks to act as agency banks to undertake Government business. However, the government had reversed the move citing a decision taken by the Centre “at the level of the Finance Minister” in September 2012 to postpone the “liberalisation of government business in favour of private sector banks” for a period of three years, according to a communication dated April 2015 which cited previous developments in this regard.

In 2015, the Centre had decided to continue with the embargo till the time the RBI conducted a “complete review of the functioning of the private banks,” the communication from the Ministry of Finance shows.

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,” the document says.

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.

While the 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.

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