India Post's focus should be inclusion, not universal banking; we don't need another PSU bank

The government is looking at taking the legislative route as early as next month to finalise the creation of proposed Postal Bank of India (PBI), media reports say. It will move the Reserve Bank of India (RBI) seeking to re-consider its original application for a universal bank, the reports said. The creation of a Post Bank would be indeed much bigger a contribution from the Narendra Modi government to India’s poor than the hurried bank accounts opening drive that is the Jan Dhan Yojana. That is because India Post has been  a trusted name in every Indian household for decades and no entity can claim the kind of reach and local knowledge the department enjoys in far-flung areas of the country where financial inclusion initiatives are actually needed. But, one point remains unclear. India Post has so far stuck to its demand for universal banking licence, which contradicts its stated focus of financial inclusion. Universal banking, by definition, is the permission for a bank to participate in all kinds of banking activities including corporate, retail and even investment banking activities. [caption id=“attachment_2024107” align=“alignleft” width=“380”]  Representational image. AFP image[/caption] If indeed PBI wants to become a full service bank and engage in corporate lending, that would, somewhat, be the creation of yet another public sector bank – a puppet of the government to roll out its populist measures and feed corporate greed. Such a move would also contradict the spirit of recommendations by the task force headed by TSR Subramanian, which proposed that PBI should be entirely focused on promoting financial inclusion, by extending small loans and deposit services to the poor and unbanked segments of the country. “The new bank would be unlike other public and private sector banks insofar as it is primarily oriented towards achieving the national and social objective of providing financial inclusion…it will be venturing into largely unbanked and under-banked areas and making a large number of loans to poor,” the report said. Further, the Subramanian panel laid down strict rules to prevent any risks to the proposed bank arising out of offering high value loans. “Robust system protocols and standard operating procedures would have to be put in place to manage these risks effectively. For example, an upper limit of say Rs 1 lakh could be placed on the credit, which would be extended by the PBI to a particular individual or even family, and a second loan would not be sanctioned unless the first loan has been repaid,” the report says. What this would effectively mean is that the PBI will have to operate purely as a pan-India rural bank offering small-ticket loans to the yet-to-be-banked segments, which is somewhat the idea of the proposed small finance bank, being planned to set up by the central bank. For this, it doesn’t need a universal banking license. The government can set up a Post bank for financial inclusion through appropriate legislation like it did in the case of Mahila Bank. As Firstbiz noted earlier, India Post’s entry into banking can be a game changer in rural banking given its massive reach in the far-flung areas of the country and local knowledge. The department has already commenced the process to link all its branches through technology, besides setting up ATMs across the country. Of its total network of 1,55,000, 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 post-offices in rural areas and about 24,000 in urban areas. Through its various saving schemes, the postal department handles deposits to the tune of Rs 6,00,000 crore. The ideal strategy for the proposed PBI would be for it to operate on the lines of proposed small finance banks as envisaged by the RBI and strictly stick to catering to small customers. Being a universal bank and engaging in multiple businesses is unlikely to serve any greater good to the targeted customer segment. India Post shouldn’t venture into corporate loans as this will only help the creation of yet another state-run bank vulnerable to political influence and victim to wily promoters. Already, over 90 percent of the total bad loans in the banking industry, about Rs 2.7 lakh crore, is on the books of state-run banks. So is a good chunk of the estimated Rs 6 lakh crore restructured loans in the banking system. We have enough evidence in the past to prove that public banks can easily be targeted for misuse and corruption by the corporate-banker-politician nexus and thus be burdened with huge additions of stressed assets. The creation of one more such entity wouldn’t do any good for the banking system, where about 14 percent of loans are already under the stressed asset category. Giving large value corporate loans shouldn’t be the focus of PBI for greater good of India’s millions of unbanked citizens.