Government Banking Business

Commercial banks play an important role in handling the banking business of the Government. In India, the Reserve Bank of India (RBI) is legally the banker to the Central and State Governments – meaning it manages their primary accounts, facilitates receipts and payments, and also manages public debt (government borrowings through bonds and treasury bills).

However, RBI has a limited branch presence. To facilitate government transactions across the country, RBI appoints commercial banks as “agency banks” to act on its behalf in carrying out government business.

Banker to Government – Role of RBI and Agency Banks

The RBI, under Section 20 of the RBI Act, is obligated to undertake all money transactions of the Central Government (and similarly for State Governments under agreements as per Section 21A). In practical terms, this means the Central Government’s main account is with RBI (specifically at RBI’s Central Accounts Section, Nagpur) and likewise for each state government.

• RBI itself handles government banking in cities where it has offices. For vast areas where it doesn’t, RBI authorizes other banks. All Public Sector Banks and several private banks are appointed as agents to conduct government transactions.
• Only designated branches of these banks can conduct government business. These are typically branches in each district or important town that connect with government treasury systems. For example, a treasury branch of State Bank of India in a district may be empowered to collect taxes or pension payments.

Types of Government Transactions through Banks

Revenue Collections (Receipts)

Agency bank branches collect various taxes and receipts for the government. This includes Direct Taxes (Income Tax, Corporate Tax, etc.), Indirect Taxes (GST, customs duty, excise in the old regime), and other payments like stamp duty, registration fees, municipal dues, or government fees.

With digital advances, many of these payments are now made via online banking or portals (e.g., the GSTN portal for GST payments allows selection of any authorized bank for net banking or NEFT/RTGS payment). The bank’s role is to accept the payment (online or over-the-counter via challans) and then remit it to the government’s account with RBI, usually by the next day. They also issue a challan or e-receipt to the payer as proof.

Government Payments (Expenditure)

Governments disburse money for salaries of government employees, pensions, subsidies, vendor payments for projects, and welfare scheme payouts. These flows are routed through the banking system.

For instance, a retired government employee might receive their pension in a bank account – the bank (as an agent) processes that payment instruction from the government treasury. Likewise, beneficiaries of Direct Benefit Transfer (DBT) schemes get subsidies (for LPG, scholarships, MGNREGA wages, etc.) credited directly into their bank accounts via the government’s payments pipeline integrated with banks. Agency banks also handle old-age pension payments in cash in certain cases (earlier, through money orders or bank cash payments, now increasingly through account transfers).

Small Savings Schemes

Banks operate various small savings schemes on behalf of the government. For example, Public Provident Fund (PPF) accounts can be opened at designated bank branches (and post offices). Similarly, National Savings Certificates (NSC), Kisan Vikas Patra (KVP), Senior Citizens’ Savings Scheme (SCSS), and Sukanya Samriddhi Accounts are available at banks.

When a customer deposits in these schemes, the money ultimately goes to the government’s National Small Savings Fund, but the bank handles the interface (accepting deposits, updating passbooks, paying out on maturity, etc.). The government compensates banks for these services.

Public Debt Servicing

When the government pays interest on its bonds or redeems them at maturity, RBI arranges these payments, but the funds often flow through banks into the investors’ accounts. Banks also participate in government securities auctions and undertake treasury operations, but those are part of banks’ investment activity. In terms of pure service, banks help retail investors invest in government bonds (for example, via RBI’s Retail Direct scheme or earlier through gilt accounts). While not “agency work” in the classic sense, it is related to government debt management.

Agency Commission and Regulations

The RBI pays an agency commission to banks for conducting government business. This is essentially a service fee. The rates are fixed by RBI (e.g., a certain rupee amount per transaction or a percentage of the amount for certain categories). For instance, a few years ago RBI’s schedule included commissions like ₹40 per physical tax challan collected, ₹9 per e-receipt, 6.5 paise per ₹100 transaction for other payments, etc. These rates can be revised.

Agency commission is an income for banks, incentivizing them to take on government business (which can be process-heavy).

• Banks must strictly follow procedural guidelines when handling government money. There are timelines for remitting the collected funds to RBI, standardized accounting (since these involve the Consolidated Fund of India or states), and audit checks.
• Any lapse (like delay in remitting collections to RBI or wrongful payments) can result in penalties or loss of agency status.
• It’s also important to note that government business volumes peak around certain times (for example, tax payment deadlines in March, or quarterly GST due dates, etc.), so banks gear up resources during those periods to handle the rush, including working on weekends at quarter-end if needed (often, RBI instructs agency bank branches to stay open on the last day of the fiscal year for tax collection).

Historical Context and Recent Developments

Before RBI was established (1935), the government’s banking was handled by the Imperial Bank of India (which was a predecessor to State Bank of India). Imperial Bank acted as banker to the government in those times. After RBI took charge, Imperial Bank and later SBI continued to handle a large share of agency work, especially for state governments and in locations where RBI wasn’t present.

For a long time, mostly public sector banks and a few private banks (like ICICI Bank, HDFC Bank in later years) were given agency bank status selectively. In 2021, in a significant change, the Government and RBI allowed all scheduled commercial banks to apply for conducting government business (earlier, a specific approval from the government was needed for private banks).

This means many more banks, including private sector banks and even some regional rural banks or small finance banks (once they are scheduled), can undertake government transactions as agents. The move was aimed at improving customer convenience (more branches of more banks can handle things like tax payments) and fostering competition (so that agency commissions are earned by more banks, not only a few).

• One notable exception historically: RBI does not handle the state government transactions for the state of Sikkim (by special arrangement, as Sikkim had a different setup when it merged with India). Instead, another bank (earlier State Bank of Sikkim) handled it. Such details are minor, but often exam questions have been framed on them.

Digital Integration

The government banking interface is now highly digital. The PFMS (Public Financial Management System) links ministries with a network of bank accounts for real-time tracking of fund transfers. GST payments are almost entirely digital, requiring banks to have robust net banking or NEFT facilities for taxpayers. The trend is toward e-governance, but banks remain an integral part of the chain, often providing the last-mile connectivity to the public.