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Private banks can now compete with their public sector counterparts for government business such as transactions related to taxes, revenue payments, pensions and small savings schemes. The decision, announced by finance minister Nirmala Sitharaman, is expected to improve efficiency and competition while helping smaller banks earn revenue.

“Embargo lifted on grant of govt business to private banks. All banks can now participate. Private banks can now be equal partners in development of the economy, furthering govt’s social sector initiatives, and enhancing customer convenience," Sitharaman tweeted.

The minister added that the Reserve Bank of India could also, in due course, authorize private banks to undertake government business.

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At present, only state-owned banks and large private banks are eligible to undertake government business, including collecting revenues and disbursing payments under various schemes. While other private banks are allowed to open collection accounts for government departments, they were not allowed to do any cash management business.

Reacting to the announcement, Kotak Mahindra Bank’s chief executive officer Uday Kotak tweeted, “It will enable the banking sector to serve customers better. Private and public sector must both work towards sustainable development of India."

In 2012, RBI had allowed private banks to handle central and state government business. However, this was reversed in September the same year after the government decided to postpone “liberalization" of government business in favour of private banks for three years.

“Earlier, other private banks had to go through PSU banks or large private banks for servicing our customers for tax collections. Government departments used to discriminate against smaller private banks on the basis of having an extensive branch network requirement. Now, that is not relevant as many aspects of government are becoming tech-centric where smaller banks can play to their strengths," said a senior banker with a small private sector bank.

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