State-owned banks always got first dibs on the banking business of the government. It was the one segment where private competition was kept at bay by regulations.
Until recently.
Now, with the government and Reserve Bank of India allowing private banks unfettered access to government business, these lenders are sharpening their strategies in the hope of making inroads into this last exclusive preserve of public sector banks.
In February, the Department of Financial Services removed the embargo it had placed in September 2012, barring private lenders from signing up as agency banks for government business. In May, the RBI released a fresh set of guidelines under which it would approve such appointments as the government's fund manager.
Since then, private sector lenders such Kotak Mahindra Bank Ltd., RBL Bank Ltd., IndusInd Bank Ltd. and South Indian Bank Ltd. have been granted approvals to become government agency banks. Larger private banks, such as HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd., which were already allowed to do some government business, are fine-tuning their strategies to garner more of it.
The excitement is understandable.
As of March 2020, banks reported Rs 11.8 lakh crore worth of deposits just from central, state and local governments, shows data available with the RBI. Apart from this, government owned non-financial corporations had deposits worth Rs 5.65 lakh crore with banks.
The idea to capture some of the deposit base while also earning income from providing services such as collection of taxes, stamp duties, enabling direct benefit transfers and other central, state and local government schemes.
Larger Private Banks Flex Their Muscles
While traditionally government business has been looked at as a way to expand financial inclusion and deliver government subsidies, bankers say there has been a change in approach recently.
Larger lenders such as HDFC Bank, ICICI Bank and Axis Bank are actively expanding their reach in the agency business by pitching better service quality and perks than their public sector peers.
According to Ganesh Sankaran, group executive for wholesale banking coverage group at Axis Bank, quality of service will be a major pull away from public sector banks.
Quality of service is important, technology is important, ease of reconciliation and reporting is important, timeliness of all the information they require is also important ... They (government bodies) are no different from customers like you and me, where they expect that everything is available to them in a seamless manner.Ganesh Sankaran, Group Executive - Wholesale Banking Coverage Group, Axis Bank
Axis Bank plans to develop in-house solutions for government bodies as part of its strategy to expand its share of the business. It will also leverage the relationships it has developed over the last few years with government entities to further expand the services it currently offers, Sankaran said.
In the case of HDFC Bank, the government business pitch will be intertwined with the bank's rural banking initiatives, making it a key growth centre. While the lender already routes tax collections through its network, it aims to deepen the engagement by chasing the money trail, a person with direct knowledge of the matter said, speaking on condition of anonymity.
The bank will also be able to aid central and state governments in cash and treasury management and distribution of subsidies, the person quoted above said. It will also look to service local administrative bodies as well.
The bank sees a two-pronged benefit here.
Apart from the fee and deposits it may garner out of the government agencies, employees of these units could be a good addition to the retail customer base for HDFC Bank, the person said.
HDFC Bank did not respond to queries mailed on Tuesday.
Increasingly larger private banks are looking at the government business from a risk adjusted returns point of view. This is a big shift from the earlier stance that this is not a business where you make money. This can encourage more innovation and help banks truly consider this as a growth driver.Vivek Ramji Iyer, National Leader- Financial Services , Grant Thornton Bharat
According to Sankaran, if anyone is to snatch away this business from government lenders it will be the larger private banks.
Government bodies need sophisticated services which address the various workflows that a government department uses to get its job done, he said. Since large private banks have been consistently making investments to provide such services and products, they are better placed to expand their business, Sankaran said.
The government business will remain a forte of larger private banks, even though the doors have been opened for others. It is simplistic to believe that this business is just about offering vanilla products, such as the highest rate on a deposit.Ganesh Sankaran, Group Executive- Wholesale Banking Coverage Group, Axis Bank
Smaller Private Banks Take A Shot
Smaller private banks, however, are not holding back and are preparing their own business strategies.
According to Virat Diwanji, group president for retail liabilities and branch banking at Kotak Mahindra Bank, they already have experience in certain government businesses.
The collection of GST, income tax, property tax, public provident fund, government savings schemes is under the agency business. All other payments and collections by governments will be under the non-agency business which we have been doing.Virat Diwanji, Group President - Retail Liabilities / Branch Banking, Kotak Mahindra Bank
The non-agency business includes transfer of funds from the National Highway Authority to state government entities, National Health Scheme payments to local level hospitals and clinics and even collection of utility bills for government entities.
According to the executive director at a mid-sized private bank, who spoke on the condition of anonymity, the inclusion into the agency banking network has opened the doors at many more government departments than before. Earlier, certain state governments would not engage with smaller private banks since they were not empanelled by the RBI, the banker said. This could now change and allow for higher 'float' or money within the bank, since tax collections stay in the bank for a longer period of time than departmental payments.
According to Diwanji, private banks such as Kotak Mahindra Bank have also been investing in growing their technological solutions for government departments. This, according to him, has helped them compete with larger peers in the market.
We also help government companies who use our solutions by training employees in using the solution and handholding them through the process. This is an opportunity for us to deepen our relationships.Virat Diwanji, Group President- Retail Liabilities & Branch Banking, Kotak Mahindra Bank
According to the banker quoted above, small and medium private sector lenders will most likely select a handful of services they can do better than their larger peers and leverage that to acquire new government business. This could include building technology solutions for:
Better toll collection and maintenance
Faster reconciliation of financial statements
Cash management for government run schools and hospitals
Payments to contract workers a government department may employ
Treasury management for large and mid-sized government firms
This will help them cut through the problem of limited branch network, the banker said.
"Branch network used to be a big sway for government business at one point. But now with business correspondent models and other tie-ups, a bank can easily scale without a large number of branches," Iyer said.
Moreover technological solutions could help smaller banks embed themselves better in local payment ecosystems, making them viable partners for future government initiatives. "This will help increase the number of bank partners available for state and local governments and make the fee structure more competitive," Iyer said.
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