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.
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.
The RBI in its communication on licensing banks has indicated that
India Post’s application will need to be examined and processed on a
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.
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.
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
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
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.
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.
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