Post Bank of India: an idea whose time has come
There is a strong case for the department of posts to set up a full-fledged universal bank
A task force headed by T.S.R. Subramanian has submitted its report to the department of posts (India Post) and one of the strong recommendations that the task force makes is the setting up of a Post Bank of India (PBI) as a universal bank. This is against the suggestion that India Post be licensed to run a payments bank.
The last institution set up by the government in the banking sector was Bharatiya Mahila Bank Ltd. It was set up without any elaborate exercise, by a mere announcement made by the finance minister in the budget. It was granted a banking licence by the Reserve Bank of India (RBI) and its contours were drawn by a committee headed by former Canara Bank chairman M.B.N. Rao. In contrast, the route taken by India Post is different. It was one of the applicants for a bank licence when the guidelines were issued in February 2013. Surprisingly, it was not granted a licence then. The press release issued by RBI on 2 April 2014 said the high-level advisory committee that examined the applications had recommended that it was desirable for the central bank to consider the case of department of posts separately, in consultation with the Indian government. From the tone of the task force report, it appears that India Post has not found favour with either the ministry of finance or RBI.
The task force surprisingly did not have any representation from the ministry of finance, from RBI or from the banking and insurance sectors—the two sectors that the report discusses in detail. Instead, the task force had consultations with the ministry of finance and RBI. The indication is that these consultations were not very positive: the report, on page 91, says, “However, after discussions with the task force, the governor of the Reserve Bank appeared to agree that PBI may enter into credit operations…,” which shows some reservations about the feasibility and desirability of India Post setting up a bank. While for the ministry of finance, it looks more like guarding the turf, RBI’s concerns about PBI’s ability to manage a large credit portfolio may be valid.
In making the bid for a bank, the task force rubbishes the achievements of the commercial banks, the regional rural banks and the cooperatives, and is often dismissive of their reach, network and penetration. There is no doubt that India Post has an extant unmatched penetration, but the dismissiveness of the achievements in financial inclusion seems to be emanating more out of frustration than merit. If it were emanating out of merit, then the report would have discussed much more data beyond the branch network and the number of villages covered. While the task force makes a very strong case for PBI, it also seeks to insulate itself from the ministry of finance by recommending that the new bank be set up under an Act of Parliament rather than as a company. The cracks between these two departments are clear.
Irrespective of these “government within government” issues, there is a strong case for India Post to set up a full-fledged universal bank. The suggestion that it converts itself into a payments bank does not change the status quo. India Post is already a payments bank. The committee has recommended a gradual approach towards expanding the credit side of the bank—having branches in all district headquarters in a period of three to five years—and has suggested that the postal outlets operate as business correspondents to the bank.
Given that we are talking of 154,882 physical touch points, of which 139,182 are in rural areas with 25,493 departmental post offices that work for eight hours a day and the experience of dealing with Gramin Dak Sevaks (almost like a postal business correspondent), the case for a PBI is already made. Compare this with the greenfield operation of Bharatiya Mahila Bank, which had added 35 branches in its one year of operation, and we know the opportunity staring at us. The postal network already sits on a deposit base that is next only to the largest bank, State Bank of India. The thought of a PBI has been with India Post for a while. It has engaged consultancy EY to prepare a detailed project report and has also gone through an open application process. What India Post does not have is the experience of delivering the assets side of the banking operation—credit.
While the concerns expressed by the regulators and the ministry of finance about credit experience may be valid, how would it gain any experience unless it starts? For that matter, of the two recent entities who got an in-principle licence, IDFC Ltd does not have a retail lending experience, and Bandhan has no experience with anything other than small loans. Both have to learn deposit mobilization, asset-liability management, treasury and compliance afresh. Therefore, the argument that India Post does not have experience is an unreasonable argument. The government should look at its business plan. The project report indicates a modest target in expansion. Once PBI gains experience, its ability to leverage its extant investment in technology and physical outreach would be immense.
The big question would be in getting appropriate human resources (HR) talent into the bank and re-orienting the existing staff to undertake this activity. At this time, if India Post needs to make a very strong pitch for a bank, it should convince the government and RBI that it can manage to rope in the HR requirement by mapping the skill sets of its existing staff and specifically laying out a road map on how the new bank will be manned.
The idea of a PBI is an idea that needs to be given due consideration and should not be brushed away. Given the priority laid on financial inclusion; given the fact that PBI would start with a strong network of individual account holders who are already saving; and that their identity and transaction trail is available; given that the postal network has the ability to physically verify the veracity of the customers through its network of postmen and post offices; given that it has already made investments in IT infrastructure, including investment in core banking solution for managing its existing business; and the formidable network for remittances, it would be a pity if this idea is not given a chance. The task force report needs serious consideration. While it might not be necessary to set it up under an Act of Parliament, the idea has merit and we would be losing an opportunity if this was not given a serious try.
Professor M.S. Sriram is with the Centre for Public Policy at the Indian Institute of Management, Bangalore.
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