Govt to earn more from deposits by opening business to pvt banks

The government is set to earn more from its deposits as it enters into business with a larger set of private banks that can offer higher interest rates, industry experts said. At the same time, public sector banks (PSBs) may be forced to shell out more than they historically have for government deposits.

Mrutyunjay Mahapatra, former MD & CEO, Syndicate Bank, said that the cost of deposits for the banking system as a whole is likely to rise because the private sector banks will now compete for government deposits. There is already a bidding system in place, but it has so far been restricted to PSBs.

“Public sector banks used to get away with a slightly lower rate because they have a larger savings account and rural fund base, whereas the private banks are very hungry for deposits. So, they might create an enhanced interest rate regime to garner these funds because there has to be transparency for government funds,” Mahapatra said, adding that the government will benefit from the process.

He also pointed out that there may have been an understanding between the government and private banks that in exchange for the embargo being lifted, private banks will have to participate in social sector activities like PSBs. The participation of private banks in financial inclusion projects, rural banking and agri lending would help ensure a level playing field between the two sets of banks.

There could also be other teething pains for private banks entering government business, analysts said. A report by Kotak Institutional Equities (KIE) said that PSBs will try to defend their turf. Further, adding a bank to the government payment system is likely to be time-consuming and would require continuous interaction with the government. “Fee income streams have a higher probability of declining in the event of higher competition.

However, it remains to be seen if the float income would offset any pressure that is likely to come on account of lower fee margins,” analysts at KIE said. They expect government deposits to be an important funding source when liquidity is tight or rates are high.

A Nomura report on Thursday said that while the top three private banks have been undertaking government agency business for the last 20 years, Axis Bank and ICICI Bank have managed to step ahead of HDFC Bank in obtaining authorisation for undertaking pension payments for the defence sector.

“Railways’ pension is a potential area which is still lying with SOE (state-owned) banks. Incidentally, in tax collections, HDFC Bank almost had a 15% market share as of FY19/20,” the report said.