Public sector banks will have to let go of one of their big advantages as the government has now allowed all private banks to participate in government businesses.

Finance Minister Nirmala Sitharaman on Wednesday made an announcement to this effect. "Private banks can now be equal partners in development of the Indian economy, furthering the government's social sector initiatives and enhancing customer convenience," the minister tweeted on Wednesday.

Private banks will thus be able to conduct government-related banking transactions such as taxes and other revenue payment facilities, pension payments and small savings schemes. These businesses were earlier under the grip of public sector lenders.

"Embargo lifted on grant of govt business to private banks," Sitharaman tweeted. "All banks can now participate."

The tweet carries significance in the backdrop of an earlier indication that the government would privatise four state-run banks. The Indian banking landscape is set to change with the policy focus going to be on consolidation in the sector and an emphasis on bigger banks.

Private banks will need to be authorised by the Reserve Bank of India (RBI) to undertake government-related transactions, including “agency business”. A government release stated, "With the lifting of 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."

Welcoming the move, Axis Bank executive director of wholesale banking Rajiv Anand said, “Our bank has a deep relationship with various central and state governments. We are delighted with the announcement. We will bring the best of technology to serve the nation.”

Bank stocks reacted positively to the government’s announcement. Shares of leading private sector banks like HDFC Bank, Axis Bank and ICICI Bank surged 4-5% in the market.