HDFC Bank, ICICI Bank and Axis Bank: Morgan Stanley says restrictions around 'government businesses' lifted for private banks

The government has lifted restrictions on private banks participating in government businesses – a material positive that will improve their share of fees/deposits at government businesses over the medium term. Morgan Stanley awaits operational guidelines to gauge the extent of potential upside.

The government has lifted restrictions around government/government agency business allocation to private banks. This could include various government related banking businesses: Reuters

The government has lifted restrictions on private banks participating in government businesses – a material positive that will improve their share of fees/deposits at government businesses over the medium term. Morgan Stanley awaits operational guidelines to gauge the extent of potential upside. HDFC Bank Share price today is Rs 1621, up Rs 15 or 0.9%. ICICI Bank share price today is Rs 637, down Rs 4 or 0.6%. Axis Bank share price today is Rs 781, up Rs 30 or 4.1%.

The government has lifted restrictions around government/government agency business allocation to private banks. This could include various government related banking businesses such as taxes and other revenue payment facilities, pension payments, small saving schemes,etc. Recall that in 2012 the government restricted the RBI from allocating further government business to private banks.

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While large private banks (HDFC Bank, ICICI Bank and Axis Bank),unlike midsized banks, were allowed to participate for a relatively longer period (around a decade) before that, government business allocations saw limitations thereafter. The embargo was mainly related to government businesses handled by the RBI – in other government businesses such as those of state governments/state government agencies etc, private banks have been actively gaining share.

Morgan Stanley awaits final guidelines around government businesses that will be available (there are multiple good profit pools) as well as operational details/limitations, if any, around execution. Private banks are leaders in technology and innovative solutions. Moreover, they have significantly increased their geographical advantage as well as product capabilities – this can help them win significant business over the medium term, Morgan Stanley believes.

Morgan Stanley notes that private banks' deposit share of government businesses, at 13%, is still lower than its overall deposit market share of 30%. SOE banks have an 85% share of government deposits (vs. 62% overall deposit market share)

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