Private Banks can now be equal partners in the development of the Indian economy, advancing the government’s social sector initiatives and enhancing customer convenience, Finance Minister tweeted.

The government has lifted restrictions on the grant of government business to private sector banks to enable better efficiency and competition.

With the lifting of the prohibition, private banks will be able to conduct government-related banking transactions such as taxes and other revenue payment facilities, pension payments, and small savings schemes.

Finance Minister Nirmala Sitharaman tweeted – 

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

The government also said that the RBI can also authorize private sector banks to carry out government business.

Currently, only state-owned banks and large private sector banks are eligible to do government business. This includes revenue collection and disbursement of payments under various government schemes.

While other private sector banks are allowed to open collection accounts for government departments, they were not allowed to undertake any cash management business, which became a major part of government business.

After this, Kotak Mahindra Bank’s chief executive officer Uday Kotak tweeted –

“It will enable the banking sector to serve customers better. Private and public sectors must both work towards sustainable development of India.”

In 2012, the RBI allowed private sector banks to handle central and state government business.

However, this was reversed in September 2012 after the government decided to postpone “liberalization of government business” in favor of private sector banks for a period of 3 years.

In an April 2015 communique, the government stated that it would continue until the RBI conducts a full review of the functioning of private banks.

However, RBI had objected saying that postponement of disbursement would not be appropriate in terms of equity, fair play, and convenience for banks.

A senior bank member said that previously other private banks had to take the channel through PSU banks or large private sector banks for even servicing the bank’s customers for tax collections. He also shared that the Government departments also used to differentiate with the smaller private banks on the basis of having an extensive branch network requirement. Now, that is no more relevant as a lot of  technical advancements can be witnessed in many aspects of government where smaller banks can play to their strengths.

This announcement will help small private sector banks to make money on tableaux coming from government accounts and schemes.

The amount of money used by the banking system to float is referred to at a time when a transfer is made to a depositor’s account until the money is withdrawn.

Analysts said this would help private banks increase revenue.

ICICI Securities report quoted-

The float and fee income that can be garnered on tax collections (Rs11tn budgeted for FY22), duties, GST collections (Rs11tn), payment facilities, state/central level pension plans (Rs2tn), small savings schemes (Rs13tn), etc can add significant delta to revenues.”

“The review of lifting the embargo on private sector banks is incrementally and directionally positive for the private banking industry – now gives them a level playing field to all private banks to compete for the government business.”

SBI currently earns 1.2% of its total revenue from commissions on government business, while Canara Bank and PNB earn 0.2% of their revenue from commissions.