Why India Post shouldn't miss the chance to be a payments bank

Amid the quest of Modi-government for a panacea to cure the illness of financial exclusion in India, is the sad reality of the country, where only less than half of population has access to formal finance, slowly losing out an opportunity to create the biggest bank for the poor-the Post Bank of India.

The Postal department has been fighting hard to enter the banking space, but has consistently failed to do so, caught up in a bitter, long-drawn battle with the finance ministry. Part of the reason why Postal department wants to become a bank is improving its financial prospects.

The department has been making losses over years due to high operational expenses and losing competition to private courier services. It posted a loss of Rs6,346 crore in fiscal 2012.

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India Post has been desperately trying to convince the Congress-led UPA government to become a bank ever since the former finance minister, Pranab Mukherjee, announced the idea of new banks in his February, 2010 union budget.

India Post, among the 25 applicants for banking license last year, didn’t manage get into the final list, but got a favorable mention from the RBI that the Postal department can indeed become a bank if the government, the promoter of the proposed Post bank, agrees to the plan.

But that didn’t happen.

Only two out of 25–IDFC and Bandhan–got the nod when RBI announced the verdict in April, 2014. To be sure, finance ministry has never been against the Postal department becoming a payments bank, it is only against India Post floating a full service bank offering large loans saying that Post lacks the skill to be a commercial bank.

But India Post has never been keen to become a payments bank, as it feels it deserves to be a full-service, commercial bank.

Now that the RBI has provisionally let the doors open for payments banks and smaller banks, the Post shouldn’t waste time to grab the opportunity.

If not as a full service bank, the Post could very well begin as a payment bank and build it up as a strong rural bank focusing on low-income groups, as and when RBI allows it to do so.

The Post bank can offer savings and services like money transfer, besides offering small loans to customers in the rural segment. It doesn’t make much for Post bank to become a full service banks and offer large-ticket loans, since that would be the making of just another public-sector bank, duly engaging in careless lending to Kingfishers and Progressive constructions, and will end up another sick bank.

On the other hand, Postal department’s entry to the banking space as a payments bank and later as a rural bank will give a massive push to the 1.237 billion population of the country, where more than half of the adult population does not have access to baking services. The Post has massive potential to become a rural bank.

Take a look at this. It has a network of about 1,55,000 branches across the country, of which about 1,39,040 are in rural areas. Going by a 2011 estimate of the postal department, about 6,000 people are covered on average by a post-offices in rural areas and about 24,000 in urban areas.

As of 31 March, the outstanding balances under the post office savings scheme stood at Rs6.05 lakh crore, which is somwhat equivalent to half the deposits of government-owned State Bank of India, the country’s largest commercial bank, and double that of the largest private lender, ICICI Bank Ltd.

The only hurdle that stands between Posts and its banking dream is its lack of experience in handling credit. But that’s something they can build up if they restrict their lending of small-ticket loans to low-income groups.

The time has been never more ripe for India Post to enter the space because, unlike the past two rounds of bank licensing, when new banks were given entry to introduce competition a market dominated by state-run banks, this time the stated agenda of RBI is on financial inclusion.

That would mean that the new banks will have to necessarily operate in the hinterland, giving the Post an edge over anyone else to spread out its service offerings to far-flung corners of the country.

Why finance ministry doesn’t want the Post to become a full service bank? Amongst the reasons are:

First, India Post becoming a full service bank would mean considerable capital allocation from the government. The department’s own estimate is that it will require about Rs1 ,900 crore in the initial few years that would include the Rs500 crore minimum capital for a full service bank. Unlike other state-run banks, Post bank will not be solely under the control of the finance ministry; the co-parent will be the Postal department. That’s not an idea the finance ministry is comfortable with. But if the government can spend Rs1,000 crore for a women-only bank, it can surely fork in a similar amount for post bank, which will be far more meaningful.

Second, with outlets across the country and a gigantic depositor base already in various post bank schemes, Post Bank can offer a stiff competition to State Bank of India and other public sector banks. There has been strong lobbying from state-run banks against the Post bank proposal ever since the department became an surprise contender in the list of 25 applicants for new banks.

Even as a payments bank, the Post Bank can eat into a significant share of deposits of state-run banks.

Third, presently, the savings deposit generated by the postal department goes to the consolidated fund of India, which is used by the government to spend for the development of public infrastructure in the country. In the possible event of a shift in the depositor base of Postal department to the proposed Post bank, that could mean an erosion in this money flow.

Having said this, Chidambaram is a past memory in the North block; Jaitley can very well have a favorable stance on Post bank. It is upto the department to grab the opportunity.