Private sector banks to handle government business – How about a level playing field?  

February 2, 2012

The RBI has allowed other private sector banks to handle government business but a few more steps are required to ensure a level playing field for all players for healthy growth of banking in India

Gurpur

The Reserve Bank of India (RBI) has just issued a notification whereby private sector banks are now permitted to handle central and state government business on complying with certain formalities. This will be a step forward in removing the discrimination existing at present between the private and the public sector (nationalised) banks (PSBs).

In fact, three private sector banks, ICICI Bank, HDFC Bank and Axis Bank were treated as more equal than others and allowed to handle government business since long due to the clout they enjoyed with the powers that be and repeated requests from other private banks to treat them at par were not heeded to so far.

Now that RBI has loosened its strings by allowing all the private banks to handle government business, this will not only help these banks to improve their business, but more importantly, it will be of great help to the customers. Customers of these banks and the public at large will be able to do transactions with the nearest branch of any bank they are comfortable with and those who are able to offer better customer service, irrespective of the ownership of the bank concerned. It is not uncommon to see a huge crowd in some of the PSBs like State Bank of India (SBI) during the first week of every month, where customers have to wait for a hours together to get their pension while at the same time the private banks’ branches wore a deserted look for no fault of theirs.  

However, this notification issued by RBI, though not very clear, hopefully will include payment of pension to employees of the central and state governments and those of the defence forces, who now get their pensions only through the PSBs. It would be of great help to these pensioners, if both the governments start disbursing of pensions through any public or private bank according to the choice of the pensioner, thereby helping the retired employees, especially the senior citizens in their old age.

There are still a few more areas of discrimination against the private banks and the RBI should take steps to remove these anomalies and provide a level playing field for all the banks in the interest of encouraging competition and improved customer service.

At present, the Government of India (GoI) provides interest subvention of 2% and 3% on short term crop loans only to the PSBs, co-operative banks and regional rural banks, in respect of their lending to agriculture on certain terms and conditions, to encourage them to lend to the agriculturists at a subsidized rate of 7%. While this will help PSBs to attract farmers into their fold for increasing their lending to the priority sector, the same benefit is not available to private banks, which also have to meet priority sector lending targets or face penalty prescribed by the RBI.

If the subsidy is to encourage lending at a lower rate to the poor people, there is no rhyme or reason, why private banks are excluded from this scheme and the RBI is a silent spectator to this discrimination practiced by the central government.

Again, the central government has been periodically issuing instructions to public sector units or companies (PSUs) to bank and place their surplus funds with PSBs only, even when the PSUs may get better terms or interest from the private banks. This is not only against the interest of the PSUs but also in conflict with the good corporate governance expected to be practiced by all the companies in general and the PSUs in particular. RBI as the regulator of banking sector has the responsibility to ensure that all banks are treated fairly in the interest of orderly development of banking in India.

Let us hope that this will be beginning of an era of equality and fair play for all the banks and the steps initiated by RBI should be a forerunner for licenses to be issued for setting up new banks in the private sector.

(The author is a financial consultant and writes for Moneylife under the pen-name ‘Gurpur’)