Banks Look for Business by working towards gathering deposits with low costs
Agencies hit hard for float as Govt. makes the fund less accessible
The Centre’s just-in-time’ mechanism to release money for government agencies, including at the state level, has forced banks to rework their fund-raising strategy as they have lost out on low-cost current and savings account float.
Worst hit are public sector banks such as State Bank of India, which have now activated the SME and trade segments to raise more current account deposits to make up for the gap. “For the last few months, we have been reaching to trade and industry and offering them cash management products with value-adds to attract their deposits. That is yielding good results”, SBI chairman Dinesh Khara recently told TOI. SBI is the biggest designation for government departments and agencies, both at the Centre and the states.
|TO Reduce Cost For Govt|
|Funds are now released after money in a government agency’s account is fully spentRules have been tightened to ensure that no money is transferred to third account to circumvent rules||This is meant to make system more efficient, reduce cost for govtEarlier, banks were using these funds as free float. @@@###$$$! ###########*|
The general manager of another public sector bank said that government agencies have traditionally been a good source of deposits and state-run players have been seeking to get more from the private sector, but there is intense competitions from private lenders.
The hunt for low-cost CA-SA deposits comes at a time when banks are seeing good growth in loans, especially retail, and are competing with small savings schemes, which offer attractive returns.
For the Centre, the shift to just in time method of fund release is meant to ensure savings at the overall level as government agencies would sit on the money released to them under various schemes. “We are borrowing at 7.5% and the best the agencies can hope to get is 4%. So, why not save that by making the system more efficient”, said a government official, adding there is better assessment of the expenditure as well as sequencing of the spending.
As a result, the finance ministry is now insisting that government agencies should not seek funds till they have exhausted the balance in their accounts. This officials said, is also
meant to ensure that money is spent instead of the earlier system where government agencies, including the states, had to provide utilization certificates, system they believe was often gamed
What has further put pressure on the ministry’s decision to ensure that there are no leakages from the system that has been gradually expanded to cover all central expenses from a limited number earlier. After implementing the mechanism it observed that some agencies were opening new accounts with banks in which the money released was transferred, enabling them to make fresh demands.
An official said that now the Public Financial Management System (PFMS) has been made more foolproof to ensure that transfers to other accounts are also captured.