Mumbai: The
finance ministry has opposed India Post’s plan to seek a
commercial banking licence from the Reserve Bank of India (RBI) on grounds that
the postal service doesn’t have the expertise needed in relevant areas, such as
handling credit.
India
Post is keen to set up a commercial bank called the Post Bank of India, arguing
that it can significantly boost financial inclusion in Asia’s third largest
economy through its nationwide network of 155,000 post offices.
This
will also allow the organization, which posted a loss of Rs.6,346 crore in fiscal
2012, to make up for business dropping off over the years as letter writing
dwindled and private courier firms took away market share.
Losses
have significantly increased in recent years on account of higher expenses.
However,
the finance ministry’s department of financial services doubts India Post’s
ability to set up and run a bank, according to a senior postal department
official who didn’t want to be named.
Some
of the country’s large public sector banks have also been lobbying against the
proposal, concerned that India Post, with its vast branch network, could pose a
threat to their business, said the official, who’s directly involved with the
proposal.
“The
larger idea of setting up a bank is to further the cause of financial
inclusion. Entry of India Post into banking can significantly help address this
situation,” the official said.
However,
“They (finance ministry officials) are asking too many questions. Why (do) you
need a bank? What is your expertise to run a bank?” the official said.
India
Post is engaged in several related functions, such as running a savings bank
scheme, selling tax-saving instruments and accepting public provident fund
deposits. The government also uses post office accounts to route payments to
beneficiaries as part of the rural jobs programme and the direct transfer of
subsidies.
A
former government official said the postal department should focus on its
existing business.
“It
is totally illogical for the postal department to enter into banking. They do
not have the experience in handling credit or the ability to manage a bank,”
said D.K. Mittal, who was finance
secretary till recently.
“Mere
experience in collecting deposits under the post office scheme is not enough.
The department should ideally focus on improving their core activity.”
and
try to become profitable instead of diversifying operations. According
to Mittal, the department should adopt new technology
RBI
invited applications from private and public sector entities in February to set
up banks, three years after former finance minister Pranab Mukherjee made the suggestion and nine
years after the last round of licences were issued.
The
application deadline expires on 1 July. The minimum capital required by
applicants is Rs.500 crore.
Companies
that have expressed interest in starting banks include L&T Finance Holdings Ltd,India Infoline Ltd, Religare Enterprises Ltd, Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd, LIC Housing Finance Ltd, Bandhan Financial
Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, Tata Capital Ltd, IDFC Ltd, Reliance Capital Ltd, India Infrastructure Finance Co. Ltd, Bajaj Finserv Ltd and Srei Infrastructure Finance Ltd.
Despite
the finance ministry’s reservations, India Post is determined to go ahead with
its application and has appointed consultancy firm Ernst and Young (E&Y) India to advise it on the plan,
officials said.
The
department is still in consultation with various ministries on the modalities
of setting up a new bank.
While
the plan is almost two decades old, the department got serious about it
sometime in 2006, conducting internal viability studies and seeking the opinion
of consultancy firms.
The
move gathered momentum when RBI announced final licensing norms for new banks
in February.
According
to an interim report submitted by E&Y India in April, the proposed Post
Bank of India will focus on the bottom of the pyramid, or the poor, in
non-metro centres and avoid urban areas that are already well served by large
banks.
“The
existing deposit holders under the post office savings bank scheme will have an
option to transfer their deposits to the bank if they choose to do so,” said
the postal department official cited earlier in the story.
In
the initial phase, the Post Bank will have 300-400 branches and a specific
number of postal outlets will be managed by each of them.
According
to the official, the department of posts plans to introduce an advanced
technology platform that will connect all post office branches. It has also
studied models of post offices that run banks in Germany and Japan.
E&Y
will soon submit its final report to the postal department, said Ashvin Parekh, partner (financial services).
“There
have been some concerns raised by the finance ministry regarding the proposal,”
he said. “We are in the process of submitting our final report, which
will...answer all...concerns.”
Financial
inclusion, or ensuring that more of the country’s citizens become part of the
banking system, has been a key aim of both the central bank and the
Congress-led United Progressive Alliance government for several years. About
40% of India’s population still do not have access to formal financial
services.
RBI
introduced a three-year financial inclusion programme in April 2010 that saw
banks opening outlets in 200,000 villages. RBI has advised banks to draw up a
financial inclusion plan for 2013-2016 to further broaden access.
India
Post will pitch its vast branch network as an advantage in this direction,
although the current state of some of these outposts isn’t likely to inspire
much confidence in those looking for a safe place to keep their money.
Out
of the total 154,866 post offices, 139,040 are in rural areas. About 6,000
people are covered on average by a post office in rural areas and about 24,000
in urban areas, according to a 2011 estimate by the postal department.
As
of 31 March, the outstanding balance under the post office savings scheme stood
at Rs.6.05 trillion, which
is equivalent to half the deposits of government-owned State Bank of India, the country’s
largest commercial bank, and double that of the largest private lender, ICICI Bank Ltd.
E&Y’s
Parekh said: “The idea is not to convert the existing post office savings into
a bank. The plan is to create a completely new bank. Hence there won’t be any
large requirement of capital in the beginning,”
As
for the finance ministry’s concerns about lack of credit experience, Parekh
said: “This can be built up gradually.”
