Suddenly, India might have a surfeit of banks.
The Reserve Bank of India recently announced draft guidelines for the entry of new private sector players even though there is no shortage of banks in the country: we have seven banks in the State Bank group, 20 nationalised banks, 21 private banks and 19 foreign banks with nearly 80,000 bank branches between them spread all over.
And that's not all. Over and above this, we have innumerable regional rural banks, and private and state cooperative banks, not to speak of non-bank financial companies and financial institutions. Now, many non-banks want to become banks.
So do we need the Post Office to also become yet another bank? Minister of State for IT and Communications Sachin Pilot thinks so - in line with what all his predecessors have been thinking for decades now. He said: "It will fulfill UPA's agenda for financial inclusion if we are a full-fledged bank. We have a huge network and wide reach in rural areas."
If it were only that simple. The logic for converting the post office into a bank is three-fold.
One, its main business of delivering letters and money orders is shrinking and losing money. In the era of email and sms, no one actually writes anything to anyone using a post card or envelope. For those who want their letters and documents delivered pronto, India Post is only a second choice among couriers.
Two, the post office has a huge branch network - some 1,55,000 offices, and 90 percent of them in and semi-urban rural areas. So any bank built over the ruins of a post office would have twice the reach from day one.
Three, India Post has some nodding acquaintance with handling money - there is already a post office savings bank with 24 crore account-holders. Many small savings schemes like National Savings Certificates (NSCs), Monthly Income Schemes, Postal Life Insurance, and Kisan Vikas Patras (KVPs) are sold though the post office network.
If all this sounds like qualification enough to become a bank, think again. This is quite apart from the fact that India does not need yet another bank.
Reason: the key to successful banking lies in lending and risk-assessment, not raising deposits. In this area, the post office's experience is zero. Just zero.
Consider how the post office works now. It uses its branch network to collect deposits and sell products like NSCs and KVPs. But it does not have to worry about raising enough income to cover the cost of deposits by lending to creditworthy companies or borrowers. The money raised is shovelled into the coffers of state governments and the latter pay off the interest from tax revenues. Or even more borrowings.
In short, the post office has no experience in doing the one thing that really matters to banking success: finding good borrowers.
The second argument - that its 1,55,000 branches will give it the right platform for growth - boils down to saying this: we have real estate in far corners of India. By this yardstick, petrol pump owners should also be running banks, for they own pumps in all kinds of places. Owning real estate - and often is places which make little commercial sense - is not a qualification for running a bank.
Moreover, Indian banking is very competitive - and India Post does not have competition embedded in its DNA.
The third argument, that the main postal service is a loss-maker, is the weakest of them all. Failure in one business is no reason to dabble in another, more complex, business like banking.
Yet another issue is the attraction of talent. Good bankers are hard to find even in India. Why would any banker working with State Bank or Bank of India want to work for the post office?
The world is littered with the corpses of banks that failed (in the US, the likes of Citibank needed bailouts in 2008 from Uncle Sam; in India, Global Trust Bank and New Bank of India needed white knights to rescue them from disaster). There is thus no need to add one more potential basket case with no experience in banking whatsoever.
So what should India Post do?
The answer is obvious: as owner of real estate, what it needs to do is leverage it. It can offer its real estate - either as a national package or a regional bundle - to any bank for running branches for a fee. This can be done through an open bidding process once the Reserve Bank of India allows new private banksto enter the picture. They will be eager to hop on board, for one condition they have to meet is having 25 percent of their branches in rural areas.
Net result: India Post gets rental incomes without the risk. You don't need to become a bank to make money from banking.
India Post already earns fee income from selling a whole range of financial products like mutual funds, pension payments, et al. Allowing banks to sell more from its premises will enable it to wipe out its losses in a jiffy.
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Updated Date: Dec 20, 2014 04:16:04 IST