Banks unfazed as fee for govt business turns deal-based

The Reserve Bank of India's (RBI) prescription for transaction-based charges for handling the government business will result in a sharp fall in revenues, but banks still find focusing on the government business profitable.

Bankers said the size of activity and the mass character still makes the government business an attractive proposition, despite being unable to recoup the fall in revenue and investments in the IT infrastructure for this segment.

State Bank of India (SBI), which has a major share in this business, views the RBI's move to take Indian banking industry a step forward towards international best practices as a welcome step.

A senior SBI official said, "The decision to shift to per transaction fee from volume-based charges had to come today or tomorrow to align with international norm."

G V Nageswara Rao, chief executive of IDBI's commercial banking unit, said, "There will be a substantial fall in income due to shift from volume-based to transaction-based fee structure. However, we are not giving up focus on handling the government receipts (mainly tax collections) and payments and pensions."

The RBI had carried out detailed study and consulted banks before taking the decision. Under the revised framework, banks can charge Rs 60 for every pension payment and Rs 45 for others.

The receipts and pension business look attractive while payments segment looks unattractive. IDBI Bank would concentrate on the first two businesses. The yields from pension accounts are higher compared with regular savings accounts, Rao said.

Keeping in mind the new fee structure, banks would have to scale up volumes to make their presence in this segment cost effective, Rao said.

A senior private sector banker said the investments made in in the customised software for MIS and offering online services would be difficult to recover fully.

Private sector banks will lose out on floats as the turnaround time for the funds is just about three days as against 11 days for public sector banks.

Central Bank of India general manager S Suresh said the change to fee per transaction is "not a bad bargain". On net basis, the bank will get more income through large number of transactions.

Bankers involved in the government business activity are assessing the exact impact of the RBI decision on revenues and are reworking strategies either to lessen adverse impact or perhaps work aggressively to increase the size of business.