Using the massive India Post network for banking services would give a big push to financial inclusion
April 17, 2014:
The issue of granting new commercial bank licences was mooted in the Union Budget of February 2010. Since then there have been discussion papers, draft guidelines and, after the final guidelines were issued, 25 applications have been under close scrutiny.
The process came to an end with the Reserve Bank of India (RBI) announcing the grant of in-principle approval to two applicants — Infrastructure Development and Finance Corporation Limited (IDFC) and Bandhan Financial Services.
In the case of India Post, however, the RBI has indicated that its application would need to be put through a different process in consultation with the government.
Opening up the licensing window periodically results in a spate of complications and it is now recognised that it may be better to have a system of ‘on tap’ applications. Moreover, thought is being given to a system of ‘differentiated bank licences’; the full guidelines still have to be set out and this will take time. The 22 applicants that have not been granted a licence will need to reapply.
Long haul: The two entities given in-principle approval — IDFC and Bandhan — are likely to take very different courses to setting up banks. It will, however, be a decade before they become forces to reckon with. In fact, as Rajiv Lall, Chairman IDFC, rightly points out, the setting up of a bank is a marathon, not a sprint.
Potential: The RBI in its communication on licensing banks has indicated that India Post’s application will need to be examined and processed on a different footing.
Ostensibly, a major thrust to financial inclusion is one of the key reasons for considering the formation of new banks.
It is here that India Post will take centre-stage. There are 155,000 post offices, of which about 140,000 (90 per cent), are in the rural areas. As such, India Post is pre-eminently suited for a bank licence. Trying to achieve financial inclusion without a central role for India Post would be like stagingHamlet without the Prince of Denmark.
History: The idea of a postal bank was mooted in the late 1980s by the then Finance Secretary S. Venkitaramanan and he subsequently followed it up after he became RBI Governor in December 1990. But the proposal was shot down by the Ministry of Finance.
The Ministry’s opposition arises from the procedure followed for savings garnered by the postal system. The funds collected under various schemes are remitted to the government and the postal system draws on the government when there are outgos. Since the totality of inflows each year invariably exceeds the outflows, the government gets a bonanza.
Apprehensions: The erroneous apprehension is that there would be an unmanageably large cash outflow from the government when the postal bank is set up. This issue can be easily tackled.
First, for the outstanding savings-bank balances (i.e. the pre-zero balances) the government could issue non-negotiable securities with varying maturities ranging from treasury bills to long-term bonds.
The interest rate on these bonds could be negotiated by the Postal Bank and the Ministry of Finance and should be above the present postal savings bank rate to cover operational expenses and any future rise in the savings bank rate.
Second, as regards time deposits, the pre-zero liabilities could be discharged on the due date by the government and any fresh time deposits would be the liability of the Postal Bank. Third, for certain schemes, such as Provident Funds and Senior Citizen Retirement schemes, these could be handled by the Postal Bank on an agency basis, for which the Postal Bank could be suitably remunerated.
Capital: It is estimated that about ₹1,800 crore would be required to set up a Postal Bank. The Government is being approached for ₹623 crore and the rest will be raised by the Postal Bank from the market.
The Bank will be of a very different genre than the present public sector banks and, as such, should not be rejected as yet another public sector bank that may not be desirable.
Branches: A bogey raised is that the Postal Bank will not be able to handle the large network of branches.
This could be a calibrated process in which, initially, a few offices could be set up as branches and select Post Offices could be designated as extension counters with all other post-offices operating as an agency network. In course of time, the extension counters can be converted into full-fledged branches and new extension counters set up. Over some years, a large network of Postal Bank branches could be set up.
Investment skills: The Postal Bank will need a team of skilled specialists to invest in government securities and money market instruments. The Postal Bank should be able to earn on its portfolio of investments a margin well above the cost of funds, which would make it viable.
Limited lending: The Postal Bank should initiate lending operations very cautiously as it builds up lending skills.
Loans should initially only be given by a few select branches with skilled personnel and restricted to small amounts.
It would, of course, be necessary to ensure that lending operations are based on transparent criteria with strict observance of lending norms.
Financial inclusion: The new government should undertake a concerted drive to remove the conceptual cobwebs preventing the setting up of a Postal Bank, considering the great potential such a bank has for taking banking to the masses.
The writer is an economist
(This article was published on April 17, 2014)
