Smaller Private Banks May Benefit From Access To Government Business

A decision to allow private banks to once again vie for government business could help smaller such lenders, brokerages said a day after the Finance Ministry made the announcement.

Private banks have been given access to government business, such as salary and pensions, tax collections and disbursements for schemes, in stops and starts. At present, only the three or four largest private banks do such business along with government-owned lenders.

Brokerages said smaller private lenders can benefit from garnering government business, even though the fees associated with it are not large. Access to government deposits, however, can be beneficial.

Jefferies

• With the government opening doors to all private banks for the agency business, smaller private banks are likely to be key beneficiaries.
• This will help them retain float-deposits for longer and deepen relationships with clients. That’s because the inability to offer tax-payments is a friction — so either the client keeps the tax-payment money with empanelled banks or smaller private banks would transfer money to empanelled banks a few days ahead of due date.
• Also adjusting for the time taken to rebuild deposits, banks estimate they were losing about 10 days’ of current deposits (zero cost deposits).
• It can also compensate for the recent change in current deposit norms which had some negative impact on smaller private banks.
• IndusInd Bank will be a key beneficiary of the opportunity to conduct agency business and other retail saving plans. “We estimate that if 10% higher current deposits replace term deposits, it can drive 3% upside to FY22 profit before tax and strengthen the quality of the deposit franchise.”
• Kotak Mahindra Bank could also see close to 2% earnings upside from higher current deposits.

Morgan Stanley

• This is a material positive that will improve their share of fees/deposits at government businesses over the medium term.
• Private banks are leaders in technology and innovative solutions. Moreover, they have significantly increased their geographical advantage as well as product capabilities — this can help them win significant business over the medium term.
• Private banks’ deposit share of government businesses, at 13%, is still lower than its overall deposit market share of 30%. State-owned banks have an 85% share of government deposits (vs 62% overall deposit market share).

Motilal Oswal

• This step is positive for private banks as the lifting of these restrictions would provide them access to a greater transactional pool, adding to their fee income profile — “we foresee some opportunities on the lending/deposit side as well”.
• Banks such as HDFC Bank, ICICI Bank, and Axis Bank are already offering collection services.
• Private banks have been at the forefront in terms of providing cutting-edge technology. Thus, this step is likely to enhance customer convenience, provide healthy competition, and result in higher efficiency in customer services.

Systematix Group

• The total size of commission paid to agency banks is approximately Rs 3,880 crore and it has remained stagnant for the past four years. Therefore, the degree of impact isn’t substantial.
• Nonetheless, it is positive for large private banks like Axis Bank, HDFC Bank and ICICI Bank in a medium-to-long time frame. Directionally, the decision is going to be negative for PSBs over a period of time.
• Would private banks satisfy themselves merely with fees/commission? Government sector’s ownership in total deposits, current account deposits, savings account deposits were at 8.4%, 10%, 8.2% respectively as on end-March’20. This would be another large opportunity for private banks. PSBs market share in government deposit is ~80%.