The finance ministry on Wednesday allowed all private sector banks to participate in government-related business, like collection of taxes. pension payments and small savings schemes.
At the moment, only few large private sector are allowed to conduct government-related business.
This step is expected to further enhance customer convenience, spur competition and higher efficiency in the standards of customer services, an official statement said.
"Embargo lifted on grant of Govt business to private banks. All banks can now participate. Private banks can now be equal partners in development of the Indian economy, furthering Govt's social sector initiatives, and enhancing customer convenience," Finance Minister Nirmala Sitharaman said in a tweet.
Private sector banks, which are at the forefront of imbibing and implementing latest technology and innovation in banking, will now be equal partners in development of the Indian economy and in furthering the social sector initiatives of the government, the statement said.
"With the lifting of the embargo, there is now no bar on RBI for authorisation of private sector banks (in addition to public sector banks) for government business, including government agency business. The government has conveyed its decision to RBI," it added.
The government has already announced its intent to privatise two public sector lenders, other than IDBI Bank, in the Budget 2021-22.
Sitharaman, while presenting Budget 2021-22 earlier this month, had announced the privatisation of Public Sector Banks (PSBs) as part of the disinvestment drive to garner Rs 1.75 lakh crore.
"Other than IDBI Bank, we propose to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22," she had said.
The government last year consolidated 10 public sector banks into four and as a result, the total number of PSBs came down to 12 from 27 in March 2017.
As per the amalgamation plan, United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank, making the proposed entity the second-largest PSB.
Syndicate Bank was merged with Canara Bank, while Allahabad Bank was subsumed in Indian Bank. Andhra Bank and Corporation Bank were amalgamated with the Union Bank of India.
In a first three-way merger, Bank of Baroda merged Vijaya Bank and Dena Bank with itself in 2019. SBI had merged five of its associate banks -- State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad -- and also Bharatiya Mahila Bank effective April 2017.