New RBI guidelines: India Post's long wait to become a bank may be finally over

The final guidelines on differentiated banks, spelled out by the Reserve Bank of India (RBI) on Thursday, has paved the way for India’s postal department to fulfill its long-cherished dream of wearing the hat of a banker.

India Post is now likely to apply to become a small finance bank, according to a senior department official.

‘Certainly, it (the guidelines for small and payments banks), looks interesting," the official told FirstBiz on condition of anonymity. The department will conduct a feasibility study and will take a final call on the matter, the official said.

On Thursday evening, the RBI announced the final rules for payments banks and small banks. Payments banks can engage in accepting small deposits, offer ATM/debit cards, payments and remittance services through various channels and offer financial products like mutual fund units and insurance products.

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Small finance banks, on the other hand, are almost like full service commercial banks. But, these banks cannot engage in large value transactions since 75 percent of their loans must be lent to the so-called priority sector. For existing banks, this requirement is 40 percent. Also, at least 50 percent of their loan portfolio should constitute loans and advances of up to Rs 25 lakh.

What is means is majority of the loans of smaller banks must be lent to agriculture, micro-credit and other weaker sections.

But small banks have plenty of headroom to actively compete in the home loan and SME loan segments with other banks, even within this limit.

A small bank permit makes more sense to India Post than becoming a payments bank since the department has long cherished the dream of a lender.

The Postal department, which was among the 25 contenders for a full service banking licence last year, didn’t manage to get into the final list since the UPA-government wasn’t keen to support the move and refused to provide the department with the minimum capital required to set up a commercial bank.

But the government is unlikely to deny the chance to India Post this time since small finance banks will not deal in large value credit transactions.

Since the new set of banks will primarily operate among the unbanked and weaker sections, risks arising out of large-value corporate loans are limited.

Also, capital is unlikely to become a problem since under the new guidelines, both small banks and payments banks need an entry capital of Rs 100 crore, as against Rs 500 crore needed for full service banks.

According to the RBI guidelines, small finance banks can gradually grow to a full service commercial bank if the apex bank finds merit in the proposal.

Big boost to financial inclusion

India Post has all along argued that the department’s entry to banking can contribute massively to the cause of financial inclusion, or the process of spreading banking services to the unbanked population of the country, using its vast network of 1,55,000 post offices.

Of its total network, 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, Postal department handles deposits to the tune of Rs 6,00,000 crore.

As First Biz noted earlier , India Post’s entry into banking can be game changer in rural banking given the massive reach of Post 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.

Last year, while issuing licenses to IDFC and Bandhan, the RBI had observed that India Post can be given banking licence if government, technically the promoter of the proposed Post bank, gives its nod.