The government is set to earn more from its deposits as it enters into business enterprise with a bigger set of private banks that can give greater interest prices, market specialists stated. At the very same time, public sector banks (PSBs) may well be forced to shell out more than they historically have for government deposits.
Mrutyunjay Mahapatra, former MD & CEO, Syndicate Bank, stated that the price of deposits for the banking technique as a entire is most likely to rise since the private sector banks will now compete for government deposits. There is currently a bidding technique in spot, but it has so far been restricted to PSBs.
“Public sector banks used to get away with a slightly lower rate because they have a larger savings account and rural fund base, whereas the private banks are very hungry for deposits. So, they might create an enhanced interest rate regime to garner these funds because there has to be transparency for government funds,” Mahapatra stated, adding that the government will advantage from the method.
He also pointed out that there may well have been an understanding involving the government and private banks that in exchange for the embargo getting lifted, private banks will have to participate in social sector activities like PSBs. The participation of private banks in economic inclusion projects, rural banking and agri lending would support assure a level playing field involving the two sets of banks.
There could also be other teething pains for private banks getting into government business enterprise, analysts stated. A report by Kotak Institutional Equities (KIE) stated that PSBs will attempt to defend their turf. Further, adding a bank to the government payment technique is most likely to be time-consuming and would call for continuous interaction with the government. “Fee income streams have a higher probability of declining in the event of higher competition.
However, it remains to be seen if the float income would offset any pressure that is likely to come on account of lower fee margins,” analysts at KIE stated. They count on government deposits to be an significant funding supply when liquidity is tight or prices are higher.
A Nomura report on Thursday stated that when the top rated 3 private banks have been undertaking government agency business enterprise for the final 20 years, Axis Bank and ICICI Bank have managed to step ahead of HDFC Bank in getting authorisation for undertaking pension payments for the defence sector.
“Railways’ pension is a potential area which is still lying with SOE (state-owned) banks. Incidentally, in tax collections, HDFC Bank almost had a 15% market share as of FY19/20,” the report stated.