Small private lenders to gain as govt opens new doors of biz

Because banking is not just about service, it’s a lot of control over cash and accounting, the suddenness of the change raised challenges more than ever
Because banking is not just about service, it’s a lot of control over cash and accounting, the suddenness of the change raised challenges more than ever


Private banks can now participate in tax collections, other revenue payment activities, small savings schemes

The central government has opened up a new revenue stream for all private sector banks by allowing them to participate in government agency business. Essentially, private lenders would be able to facilitate tax collections, other revenue payments, pension and even small savings schemes.

To be sure, large private sector lenders such as ICICI Bank, HDFC Bank and Axis Bank were already allowed by the government along with their public sector peers to provide these facilities.

Smaller lenders now stand to gain as a new revenue stream has opened up for them. Analysts believe that smaller lenders such as Federal Bank and Bandhan Bank would stand to benefit given their already strong liability franchise. Kotak Mahindra Bank too will be a large beneficiary.

Flow of business
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Flow of business

The biggest benefit from the inclusion in government agency business would be of deposit accretion. At present, banks that cannot undertake agency business depend on other empanelled banks to facilitate such services for their clients. What this results in is a large outflow of deposits to empanelled banks and the need to rebuild these deposits.

“Also adjusting for the time taken to rebuild deposits, banks estimate they were losing about 10 days’ of current deposits (zero cost deposits). The irony is that smaller private banks couldn’t pay their own taxes directly and had to first transfer funds to an empanelled bank," wrote analysts at Jefferies India Pvt. Ltd.

A seamless offer of services to customers would also mean that smaller banks will be able to garner new customers faster than before. Business from government agencies is large in volume but the margins are low. Ergo, an outsized increase in revenue on an immediate basis is unlikely. Also, with loan growth subdued, lenders may not be immediately able to take advantage of a large accretion of deposits. Further, analysts at Kotak Institutional Equities point out that private sector banks are currently veering away from wholesale deposits and building on their retail liability franchise.

“While these are wholesale deposits and sensitive to interest rates, it nevertheless can be a key funding source when liquidity is tight or rates are high," said a Kotak report.

Kotak also pointed out that fee income streams have a high probability to decline as competition increases.

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