Post Bank should be for poor; we don't want one more to feed corporate-political greed

Last week, a task force headed by former cabinet secretary, T S R Subramanian and comprising experts including former Infosys board member TV Mohandas Pai, set up to review the operations of India's postal department, mooted the creation of a full-fledged Postal Bank, raising hopes that the department may finally get to enter the banking business.

Taking a closer look at the detailed proposals of the TSR panel, the proposed Post Bank of India (PBI), will not be very different from something like the small finance bank, proposed by the Reserve Bank of India (RBI) in its recently announced guidelines as part of further opening up the sector for differentiated banking regime.

According to the proposal, the PBI will 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 says.

Further, the Subramanian panel lays 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.

According to the RBI's final guidelines, small finance banks will be required to extend 75 percent of its total loans to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.

These segments include agriculture, microcredit and other economically weaker sections. Existing banks are required to lend 40 percent of their loans to the priority sector.

In fact, comparing the PBI as envisaged by the TSR panel and the small finance bank, the latter will have a structure permitting to engage in relatively large ticket loans. The RBI norms stipulate that at least 50 percent of its loan portfolio should constitute loans and advances of up to Rs 25 lakh.

But under the RBI guidelines, India Post cannot become a small finance bank. Only non-banking finance companies, micro-finance companies and local area banks with a good track record can apply to become a small finance bank.

It, however, can surely become a payments bank-which can engage in accepting deposits and the offering basic banking transaction services except credit-and later convert to a full service bank as and when the Banking Act is amended giving it the status of a standalone public sector bank.

Even if the Post Bank is set up through law, the entity will be regulated by the Reserve Bank.

Hence, it would make immense sense for the Postal department to initially seek the Payments banks licence using the available opportunity at present rather than waiting for a change in law, which can get unpredictably delayed considering the fate of initiatives for similar legislations in the past.

The task force recommendation to make the PBI a bank for small customers makes immense sense given the performance history of India's existing public sector banks.

The India Post has been nurturing the dream of becoming a full service bank for long, including the permission to handle large value loans, in later stages of operations.

By all means, the proposed PBI, by limiting its operations to small ticket loans and deposits, will do well for itself and for the larger cause of financial inclusion in Asia's third largest economy, where half of the population is still unbanked.

India Post shouldn't venture into large ticket 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 sarakari banks can easily be made targets for misuse and corruption by the corporate-banker-politician nexus and thus be burdened with huge additions of stressed assets.

Addition 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.

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.

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.

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

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, the postal department handles deposits to the tune of Rs 6,00,000 crore.

As Firstbiz has noted earlier, the safer way for India Post to make its grant entry into banking space will be by becoming a payments bank using the RBI's licensing window and later convert itself to a full service bank as and when the required legislation is enacted.

In any case, giving large value corporate loans shouldn't be the focus of PBI for its own good.

Updated Date: Dec 09, 2014 10:41:25 IST