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Business News/ Industry / Banking/  India Post pushes ahead with banking plan despite opposition

India Post pushes ahead with banking plan despite opposition

Postal department to seek cabinet approval for banking capital even after finance ministry reservations

India Post needs the government’s permission for the `500 crore that is needed to set up a bank if it gets a licence from RBI. Photo: Hindustan Times (Hindustan Times)Premium
India Post needs the government’s permission for the `500 crore that is needed to set up a bank if it gets a licence from RBI. Photo: Hindustan Times

(Hindustan Times)

Mumbai: Despite strong opposition from the finance ministry, the postal department plans to approach the Union cabinet next month seeking capital of up to 1,900 crore for a proposed commercial bank, according to two people familiar with the development.

To be called Post Bank of India, its branches will be linked to India Post’s vast network of post offices and will promote goals of financial inclusion, its supporters say.

“The department has decided to move the cabinet by October to seek the capital for Post Bank," said a senior bureaucrat familiar with the proposal. The official requested anonymity, citing sensitivity of the matter. The second person, a consultant, also declined to be identified.

An email sent to financial services secretary Rajiv Takru on Tuesday remained unanswered at the time of writing this story.

India Post needs the government’s permission for the 500 crore capital that is needed to set up the bank if it gets a licence from the Reserve Bank of India (RBI). While many government departments support the plan, some—mainly the department of financial services—have raised serious reservations, the official quoted earlier said.

India Post estimates an immediate requirement of 700 crore and an additional 1,200 crore in the first five years of its operations.

The postal department, one of 26 contenders for banking licences, decided to rush with the proposal to the cabinet because it needs to convince RBI that it has enough funds if indeed Post Bank is shortlisted, the official said.

Global consultancy firm Ernst and Young LLP (EY) has drafted the blueprint for the proposed bank.

RBI governor Raghuram Rajan wants new banking licences to be issued by January-end, before deputy governor Anand Sinha, who has been spearheading the licensing process, retires. RBI is currently scrutinizing the applications and is also in the process of setting up a high-profile panel, to be headed by former RBI governor Bimal Jalan, to screen them.

Contenders for the new banking licences include L&T Finance Holdings Ltd, Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd, LIC Housing Finance Ltd, Tata Capital Ltd, IDFC Ltd, Reliance Capital Ltd and Bajaj Finserv Ltd.

In August, the expenditure department of the finance ministry had rerouted an earlier draft cabinet note from India Post seeking 1,900 crore for the banking entry to another wing of the ministry. It asked the postal department to first seek the approval of the expenditure finance committee.

The expenditure finance committee, headed by the expenditure secretary, normally scrutinizes proposals for amounts of more than 300 crore and for the creation of new autonomous organizations, regardless of the amount.

Within the finance ministry, the department of financial services opposes the move, saying the postal department does not have the expertise to run a bank, including handling credit and other banking functions. It feels the business proposal is unlikely to be viable.

But the postal department does not agree with this view, saying it has several years’ experience in deposit mobilization and that Post Bank of India will be run by professional management using its strong network. The postal department has close to 155,000 offices spread across the nation, as many as 139,040 of which are in rural areas.

Each rural post office covers around 6,000 people on an average, and urban post offices cover about 24,000 people each, according to a 2011 estimate.

As of 31 March, the outstanding balance under the Post Office Savings Scheme stood at 6.05 trillion, equivalent of half the deposits of State Bank of India, the country’s largest commercial bank, and double that of the largest private lender ICICI Bank Ltd.

According to an interim report by EY in April, the proposed bank will focus on those at the bottom of the pyramid, or the poor, in non-metro centres, and avoid urban areas that are already well-served by existing banks.

People who already hold deposits with the Post Office Savings Scheme will have the option to transfer these to the proposed new bank, but this will not be compulsory, according to the official quoted earlier.

To begin with, Post Bank of India plans to open 300-400 branches, each also managing a specific number of postal outlets.

Globally, countries such as Germany and Japan run banks linked to their post office networks.

“India Post is the only player among the applicants with experience in deposit-taking. This is the core of financial inclusion. The finance ministry may have reservations about the Post, but its strength can’t be ignored," said Abizer Diwanji, partner and head of financial services, EY India.

Entry into banking may also help India Post to leverage its branch strength in a profitable manner. It made a loss of 6,346 crore in fiscal 2012, as letter-writing dwindled and private courier firms took away much of its business.

Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industries and country head of HSBC India, said given that financial inclusion is the key criterion for issuing new bank licences, India Post has a definite edge over other applicants.

“Not only do 90% of their branches already exist in rural India, but their reach is evident even in the most remote, inaccessible and therefore often un-banked locations in the country, thereby automatically dispensing with the problem of access to branches," Kidwai said.

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Published: 22 Sep 2013, 11:43 PM IST
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