Private sector banks could be allowed to handle provident fund and pension payments of government employees, giving them access to large amount of low-cost funds. The proposal is in response to a demand by the public sector banks for an increase in the commission fee for handling such accounts, which the official documents say could receive nearly `43,000 crore from the government on account of pension payments only.
The Reserve Bank of India, or RBI, has said that given the volume of funds involved private sector banks are willing to provide service a cheaper rate. “We can explore this with a few selected banks to create competition and efficiency, and gradually other banks can also be allowed,” said an RBI official.
A State Bank of India officer did not agree with the reasoning and said that these accounts are loss-making proposition for them given the abysmally low commission fees. “We make the payments up front and receive the money from the government after a lag of two days, the fee does not even cover the interest rates that we pay during the time period.”
These payments are funded from the borrowing in the money markets, the cost of which depends on the call money rates.
The government pays a commission of only 9 paisa per `1,000 towards pension payments, which banks say is not enough to cover the cost of funds and the heavy paperwork involved.
“There are cases where arrears of the past 20-months are to be paid. This involves a lot of paperwork and hence they should be counted as 20 transactions and accordingly payable,” said an official with Bank of Baroda adding that the current system of amount-based fee was not acceptable.
Public sector banks feel that RBI’s move to induct private banks may be a damp squib given the high cost involved in managing such accounts. “You’ve to maintain the account, manage a pass book and other details. Private banks will not enter given the cost implication,” the BoB official said.
An Axis Bank official felt it could make sense if the RBI remove certain restrictions. “First step will be to give permission to increase the number of authorised branches where customers can get payments and make deposits,” she said, adding that the government should also allow state-owned companies to open salary accounts of their employees with private banks.
In case of pension, employees have a choice to open a pension account with the three approved private sector banks — HDFC, ICICI and Axis Bank — at the time of retirement.
The apex bank may also allow private banks to open public provident fund accounts, at present reserved only for public sector banks and post offices.
