As it enters into business with a larger collection of private banks that can give higher interest rates, the government is set to gain more from its deposits, industry experts said. At the same time, banks of the public sector (PSBs) could be required to pay out more than they have for government deposits traditionally. Mrutyunjay Mahapatra, former MD & CEO of Syndicate Bank, said that as private sector banks will now compete for government deposits, the cost of deposits for the banking system as a whole is likely to increase. A bidding system is already in existence, but it has so far been limited to PSBs.
“Public sector banks used to get away with a slightly lower rate because they have a larger savings account and rural fund base, whereas the private banks are very hungry for deposits. So, they might create an enhanced interest rate regime to garner these funds because there has to be transparency for government funds,” Mahapatra said, adding that the government will benefit from the process. He also pointed out that there may have been an understanding between the government and private banks that in exchange for the embargo being lifted, private banks will have to participate in social sector activities like PSBs. The participation of private banks in financial inclusion projects, rural banking and agri lending would help ensure a level playing field between the two sets of banks.