Banks tap business, rework plan to raise low-cost deposits

NEW DELHI: 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 out 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.

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 competition from private lenders.
The hunt for low-cost CASA 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 spend.
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 utilisation certificates, a system they believe was often gamed.
What has further put pressure on the banks is the finance 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.