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The decision to allow private sector banks to conduct government banking transactions is the first step towards the privatization of a few state-owned banks, experts said.

According to them, public sector banks that are slated to be privatized have been conducting government banking transactions, and any change in their ownership status would have hampered continuity. That apart, focus on digital transactions will help private lenders as the reliance on branches for conducting government transactions, so far, the forte of public sector lenders has been declining. To that extent, India’s private lenders have been at the forefront of adopting digital banking initiatives, and this will now allow them access to a larger market through government’s businesses.

Against the backdrop of privatising public sector banks. support from private banks will be crucial as it would ease serving the last-mile delivery of financial services in rural areas
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Against the backdrop of privatising public sector banks. support from private banks will be crucial as it would ease serving the last-mile delivery of financial services in rural areas

“The government is laying the ground for privatizing some state-owned banks and has made this change so that those banks are able to continue providing services in future," a former official at the State Bank of India (SBI), requesting anonymity.

He said that private banks will get access to government deposits now like the public sector, which will be beneficial to them.

Finance minister Nirmala Sitharaman announced in the Union Budget for FY22 that the government will pare stake in two state-owned lenders apart from IDBI Bank, without specifying names. News agency Reuters reported on 15 February that those shortlisted are Bank of Maharashtra, Bank of India, Indian Overseas Bank and Central Bank of India, although there was no official confirmation.

Experts said that the support from private banks will be crucial as this would ease serving the last-mile delivery of financial services in rural areas. Besides, the lifting of embargo will also give private banks a chance to expand their customer base.

“The budget has taken this historic step to privatize public sector banks, and this, coupled with past mergers, will reduce the strength and reach of these lenders. On the other hand, government’s payment obligations, which include payouts for the pension scheme, healthcare or job guarantee schemes—will continue to increase," said Kuntal Sur, a partner at PwC.

The finance ministry on Wednesday said it has allowed private banks to conduct government-related banking transactions, including taxes, payments of pension. The latest decision will enable private and state-owned lenders to be on equal footing as far as execution of the government’s economic and social initiatives goes.

Till now, public sector lenders have been at the forefront, limiting the presence of private lenders to a few large ones. Experts also believe that while large banks will be able to gain the most, smaller regional banks like Bandhan Bank and Federal Bank would be beneficiaries.

Analysts at Kotak Institutional Equities said that the positives for private banks are better access to deposits through the float and fee income streams for the activities undertaken on behalf of the Centre.

“We note that the decision to allow private banks has been in the works for nearly a decade. Private banks have been operating with the government, and this is reflected in the market share of deposits that they have from the government," said the Kotak Institutional Equities report on 25 February.

Meanwhile, public banks have a higher reliance on government and household deposits compared to private banks, showed data from the report cited above. While government deposits formed 15.4% of all public sector banks’ deposits in FY20, they were 9.2% for private lenders in the same period. However, analysts are concerned about a potential reversal of this guideline. For instance, a few state government deposits, which had a regular running relationship with private banks, were quite abruptly withdrawn after the Yes Bank moratorium episode, the Kotak report said.

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