Private banks need to win govt's trust before vying for business

Post 2020's YES Bank crisis, chunk of government business moved from private to public banks for ease of operation

The Nifty Bank index did not register much gains on Thursday as anticipated by market experts on Wednesday, when the central government opened up its business to private banks. The reason being with top names such as HDFC Bank, ICICI Bank and Axis Bank already privy to government business, whether the recent decision can be significantly positive for the sector needs to be seen.

Touted as a move to enhance customer convenience, spur competition and set higher efficiency in the standards of customer service, the lifting of embargo on grant of government business (including government agencies) to private sector is aimed at creating a level playing field among banks irrespective of their ownership. The timing of this announcement is also interesting as it follows Reserve Bank of India’s (RBI’s) diktat in August 2020 that if a bank has less than 10 per cent of the borrower’s credit exposure, then debits to the cash credit/ overdraft accounts (CC/OD) can only be for credit to these accounts with a bank that has 10 per cent or more of the credit exposure. In short, if a bank has less than 10 per cent credit exposure to a borrower, then it cannot enjoy a larger share of the borrower’s CC/OD facility. The move was seen detrimental to the low-cost current account – savings account (CASA) business (an integral part of the float money) of private banks, given their reduced exposure to corporate debt in the recent years. Therefore, government business opening is an incremental positive.

“The float and fee income that can be garnered on tax, duties, goods and services tax collection, payment facilities, central/state pension plans, small savings schemes can add significant delta to revenues,” say analysts at ICICI Securities. According to the brokerage this is a potential revenue opportunity of Rs 37 trillion in FY22.

However, analysts at Kotak Institutional Equities note that merely opening the doors won’t make it a cakewalk for the private players. “Adding a bank to the government payment system is likely to be time-consuming and requires continuous interaction with the government and fee income streams have a higher probability of declining in the event of higher competition”, they note. Whether the float income would be material enough to offset likely pressures due to lower fee margins (due to potential competition) is another monitorable.

One should also remember how as an aftermath of 2020’s YES Bank crisis, government agencies (including states) were quick to withdraw their business from private banks and shifted it to public players. “With lockdown also gripping, transacting with public sector banks offered ease of doing business”, said a senior banker. Therefore, the possibility of the government reversing the decision would keep banks on tenterhook. Therefore, beyond the initial euphoria, lifting the embargo on government business is unlikely to be a near-term positive.