Many state governments have been asked by Reserve Bank of India to stop giving new businesses to private sector banks. Letters containing specific instructions in this regard have been sent to atleast four state governments in the last few months.

Although no specific reason has been cited by the apex bank for this move, it is inferred by the private banks that their low level of participation in government sponsored programs along with causes like employment generation and poverty reduction may have triggered the decision.

"We are having regular meetings with RBI, finance ministry and Controller General of Accounts...We are trying to convince the government how competition has helped to quicken fund transfer and cut costs," said a senior official of one of the private banks.

"Now, RBI is categorically telling states to stay away...Himachal Pradesh, Chhattisgarh and Puducherry have received such a communication and some of the Maharashtra government institutions have also been instructed when they approached the regulator," said another banker. "Private banks have initiated financial inclusion programmes, fulfilled priority sector lending obligations and have engaged in government-sponsored schemes wherever possible...Most of us don't have the reach that PSU banks have," he said.