New funding mechanism for centrally sponsored schemes hits bank deposits – CNBC TV18

The banking sector in India has been grappling with a decline in stable deposits. Among the many reasons contributing to this trend, the evolving mechanism by which the central government funds states for centrally sponsored schemes is a relatively under-discussed factor.

Until 2022, the process involved creating scheme-specific bank accounts for each state. Both the central and state governments deposited their respective shares into these accounts. Once sufficient funds accumulated, banks released payments to beneficiaries as instructed by the authorities.

In 2023, the central government introduced the SNA Sparsh portal in collaboration with the Reserve Bank of India (RBI). SNA, which stands for Single Nodal Agency, revolutionised the process. Funds for centrally sponsored schemes no longer flow into state government accounts in public sector banks. Instead, they are routed directly to scheme-specific accounts on the SNA Sparsh portal. Payments are made just in time through the RBI’s e-Kuber platform, following approval from central and state officers.

This system significantly reduces idle funds sitting in bank accounts. Previously, the central government transferred funds mechanically, often quarterly or monthly, leading to surplus funds lying unused in state accounts. The new system ensures funds are released only when required, promoting efficient cash management.

While the SNA system enhances central government efficiency, it has created challenges for states and banks. States that previously parked surplus funds in treasury bills (T-bills)terest to earn 5-6% in have lost this source of revenue.

Banks, particularly public sector ones, are also facing repercussions. These institutions relied on stable, idle deposits from state governments in their current accounts. With the shift to the SNA portal, banks are witnessing a decline in such deposits. For example, unspent funds previously reflected in state accounts are now part of the central government’s cash balances, which peaked at ₹4 lakh crore in October 2023 before dropping to ₹40,000 crore in December.

The transition to the SNA portal is ongoing. Ten states adopted the system in FY24, and eight more joined this year. The central government plans to bring nearly all states onto the portal by the next fiscal year. However, the rollout has been uneven, with some ministries advancing faster than others.

Banks, understandably concerned about losing stable deposits, have raised objections. However, the central government remains resolute, citing the overall benefits of its just-in-time cash management system. Officials argue that out of ₹20 trillion held in current accounts across banks, the reduction attributable to the new transfer mechanism is only ₹1-2 trillion. This, they assert, should not be overly blamed for the banking system’s liquidity issues.