Four Private Banks Allowed To Handle Government Business

Mumbai, Aug 29: | Updated: Aug 30 2003, 05:30am hrs
The Reserve Bank (RBI) on Friday allowed private sector banks into what was thus far a turf reserved for state-run banks: Working as agents for government business, both of the Central and state governments.

Effective from October 1, four private sector banks ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank can now handle government concerns ranging from collection of direct and indirect taxes of the Centre as well pension payments and other expenditure of ministries and departments of the central government. These banks are required to remit the collection of funds on behalf of the Centre within three days (inclusive of holidays) of proceed-realisation to the central bank to be credited in favour of the government.

While private sector banks have thus far handled government undertakings, they did not have access to the businesess to which they will now have access too. Private sector banks have also been lobbying for such a relaxation. In fact, sometime back a move by the Maharashtra government to prune the share of such banks in state-level business undertakings had caused some heartburn.

With the latest RBI move, these banks will now get much business, mostly transaction and cash-management oriented. They will also benifit from the access to free-float, which can be deployed in the inter-bank market. But with RBI making it categorical that these banks have to remit the funds within three working days (inclusive of holidays) to the central bank, the freedom to play around with these funds is limited.

Industry sources also pointed out that the entry of such banks will also pave the way for better cash management. It might be recalled that the Centre had introduced a pilot-cash management system in the Union Budget of 2003-04.

The just released RBI Annual Report for 2002-2003 refers to the same and states that the mechanism adopts time-slicing of fund release to permit convergence of expenditure with the actual requirement of resources within the year. Based n the actual requirement, montly or quarterely cash limits for various ministries will be prescribed.

The improved cash management is expected to avoid both mismatches between receipts and expenditure and the rush of expenditure in the last quarter of the fiscal year.