Banks are set to be impacted by the central revised procedure of “just in time” release of funds to states under CSS (Centrally Sponsored Schemes) .
“The designated banks have been keeping the float funds in interest bearing Savings Bank accounts (paying differential rate of SB interest to GoI on average of such funds kept with them) and the complete exodus of these funds from the banking system is likely to impact operational efficiency of the bank(s), viz. (a) increase in cost of deposits (b) increase in cost of lending (c) compressed Net Interest Income (NII) (d) loss to GoI through dividend income (PSBs) (e) loss of SB interest being paid on SNA-CSS (Single Nodal Agency-CSS) and (f) liquidity management of RBI by impacting systemic liquidity,” an SBI Research report said.
The process
Revised procedure (SNA) for flow of funds under CSS, aiming for better monitoring the availability and utilisation of funds released to the States under the schemes and to reduce float, came into effect from 1st July 2021. The principles of ‘Just In Time (JIT)’ is applied for releases in respect of all payments to the extent possible” and to bring about more efficiency in cash management at both Centre and States level Banking system will be impacted through the JIT mechanism as it impact government cash balances, it said. System liquidity slips into deficit when government is not spending whereas it improves to surplus mode when government spending resumes.
“Government cash balances do not earn any interest when placed with the RBI and it only earns interest when routed through banks….actually Government cash balances are auctioned by RBI…thus the JIT move though laudable could hurt (a) Government in terms of foregone income as outlined above and RBI in terms of conduct of monetary policy,” it said.
