Govt-related banking business: Centre lifts embargo on private banks

Until now, such transactions were mostly a preserve of the public sector banks (PSBs), and only a few private players (HDFC Bank, Axis Bank and J&K Bank) were allowed to conduct them, a source told FE.

In a move that can potentially make the bank privatisation plan more attractive for investors, the Centre has lifted an embargo that had barred most private players from undertaking lucrative government-related banking transactions. These transactions include taxes and other revenue payment facilities, pension payments and small savings schemes.

Until now, such transactions were mostly a preserve of the public sector banks (PSBs), and only a few private players (HDFC Bank, Axis Bank and J&K Bank) were allowed to conduct them, a source told FE.

The government has conveyed its decision to the Reserve Bank of India (RBI). Since the embargo is lifted, there is no bar now on the RBI to authorise private banks (in addition to the PSBs) for conducting government businesses, including government agency business, the finance ministry said on Wednesday.

“This step is expected to further enhance customer convenience, spur competition and higher efficiency in the standards of customer services,” the ministry said in a release.

However, some public sector bankers fear a loss of businesses to private competitors and sought a level-playing field. “If certain privileges are shared with private banks, so should be the social responsibilities that have proved to be costly for us,” said a senior public sector banker on condition of anonymity.

“Will we be allowed to pursue profits alone, forgetting socio-economic goals? If yes, this is a welcome move,” said another public sector banker. The Centre should free state-run banks from their implied obligation of having to push through various government schemes for financial inclusions, including the opening of no-frills Jan Dhan accounts and setting up of branches or ATM networks in remote areas, as these have bled the PSBs for years, he said.

For instance, of the 41.84 crore Jan Dhan accounts opened so far, private banks accounted for just 1.25 crore, he pointed out. These accounts don’t require the holders to ensure a minimum balance, so they remain an unattractive proposition for private banks.

However, some analysts say the move will force the PSBs, especially those with poor track records of dealing with customers, to mend their ways and shed complacency.

For its part, the finance ministry said: “Private sector banks, which are at the forefront of imbibing and implementing latest technology and innovation in banking, will now be equal partners in development of the Indian economy and in furthering the social sector initiatives of the government.” In the Budget for FY22, the government has proposed to privatise two state-run banks.