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Finmin lets private banks participate in government business: An unfair deal for state-run lenders?

Private Banks have welcomed the step but PSBs say the decision is unfair as they carry the burden of social banking

February 25, 2021 / 01:49 PM IST
Finance Minister Nirmala Sitharaman (File image: Reuters)

Finance Minister Nirmala Sitharaman (File image: Reuters)

For years, India’s public sector banks (PSBs) have acted as the primary vehicle to carry out the social banking agenda of governments by implementing various schemes. The only major benefit these banks used to get in return for doing this—the float that comes from the exclusive right of dealing business of government accounts—may soon go.

On Wednesday, the government announced its decision to let private banks participate in the business. Union finance minister Sitharaman said all private banks are now allowed to participate in government businesses. The business operations linked to the government were so far the forte of public sector lenders.

Private banks are elated with this announcement. Uday Kotak, the veteran banker, welcomed the move and called it a progressive reform. “It will enable the banking sector to serve customers better. The private and public sector must both work towards sustainable development of India,” Kotak said.

Similarly, Axis Bank too welcomed the announcement. “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,” said Rajiv Anand, Executive Director - Wholesale Banking, Axis Bank.

Analysts said this will give a big boost to private bank’s business. “The Centre’s move to lift the restrictions on grant of government business to private banks is a huge boost not just to the private banks but to the overall development of the country,” said Anish Mashruwala, Partner, J Sagar Associates.

“Private banks have been faster in bracing and internalising newer technology and systems and this move will allow those processes to be efficiently used for Government spends and projects,” Mashruwala said.

An unfair deal to PSBs?   

But, the announcement came as a body blow to PSBs that typically have to carry the burden of social banking. These banks are under pressure to implement the government schemes time to time be it the rollout of Jan Dhan accounts, rural banking, Government-sponsored loan schemes and so on.

In return, the only benefit these banks had was the float money they used to get by conducting various Government business. Float refers to the amount that is parked in banks by customers.

Government business includes handling accounts of all PSU enterprises, Government departments like Income Tax and other agencies, the state trading corporation, and all Government schemes. The funds that come regularly from these institutions help PSBs to get the float.

With this business now claimed by private banks as well, these gains will be split between private and public banks while the burden of social banking continues with state-run banks. To take an example, PSBs have opened around 42 crores of Jan Dhan Yojana accounts under the Government’s financial inclusion programme.

As against this, private banks have opened only 1.25 crore accounts, according to data shared by bank employee unions. Many of these accounts remain zero balance and banks have to shell out Rs 60-Rs 70 to maintain these accounts.

Also, PSBs operate in rural areas aggressively for expansion of banking services while most private banks are restricted to metros as a rural business is not profitable for these banks. Also, PSBs are the main lenders to the agriculture sector and MSMEs.

“The government business help the business to have the float from all these transactions. This used to compensate the cost of doing social banking to an extent. Now that benefit is taken back with this announcement,” said C H Venkatachalam, secretary of All India Bank Employee Union (AIBEA).

PSBs under pressure to do social banking

PSBs have faced significant pressure from the Government during the rollout of government schemes including the recent Rs 3 lakh crore MSME loan scheme. Government typically pushes state-run banks on such schemes to meet targets.

On February 24, the state-level bankers’ committee, Madhya Pradesh wrote to the Secretary of Financial Services citing that State Bank of India’s Magaria branch was sealed during business hours on 22 February by district authorities.

The bank cited the reason for this as non-disbursement of the proposals under the Pradhan Mantri Street Vendor's Atmanirbhar Nidhi, CM Rural Street Vendor Scheme due to requirement of formality by the beneficiaries after repeated follow up by the Branch.

The branch was sealed by Additional District Magistrate along with several police personnel forcibly evicted the branch staff and sealed the Branch.  As per the District Administration, the reason put forth for sealing the Branch is that the Branch is operating from residential property doing commercial business.

“Incidentally, such type of incidents in the state seems to be on a rise, pressurizing the Banks for sanction and disbursement of more and more number of proposals under the aforementioned Schemes,” said the letter. Moneycontrol has a copy of the letter. On 24 February, the AIBEA issued a statement condemned the forced sealing of the branch.

PSUs will suffer a double whammy, say unions

Letting private banks to do government business will impact PSBs as Government’s business to PSBs helps to cross-subsidize the cost in carrying out Government schemes, Venkatachalam said.

“Public sector Banks’ social banking obligations have the cost.  A lesser rate of interest on agriculture loans or education loans or MSME, etc. ha a cost to the Banks.  The government’s business to these Banks helps in cross-subsidization of the cost.  If Government will distribute their Govt. Business to private banks, the ability of public sector banks to lend to weaker and priority sectors on concessional rates of interest will become difficult,” Venkatachalam said.

Unions have demanded the Government to roll back the decision to give government business to private banks. In the past, the Government had mulled giving government business to private banks but the decision wasn’t implemented then.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Feb 25, 2021 10:28 am