The key to the success of India Post Payments Bank will be its business plan and if that’s in place, technology
People have been waiting eagerly for the launch of the India Post
Payments Bank or IPPB, the largest among the eight that are likely to
start operations over the next few months. Eleven entities received the
Reserve Bank of India’s (RBI’s) in-principle approval for floating
payments banks but three of them have left the field.
Originally, the department of posts, or DoP, which has been running the
post office savings bank, wanted to set up a universal bank. It had even
applied for a licence. The proposal was discussed at the Public
Investment Board, which examines the investment plans of various
ministries worth at least Rs100 crore, and it advised DoP to set up a
“differentiated bank”.
Accordingly, DoP applied to RBI, seeking a licence for a payments bank
and got an in-principle approval on 7 September 2015. The bank has to be
made operational by March 2017 but it seems the government wants it to
be launched in January. This makes eminent sense in the wake of the
demonetization drive— India’s financial sector is witnessing turbulence
and the payments space is waiting to be grabbed with new ideas and
innovations to give a big push to a cash-less economy.
IPPB will start with a Rs400 crore equity capital and a Rs400 crore
grant from the government to set up a technology network in rural India.
Incidentally, India Post, which is run by DoP, is not converting itself
into a bank even as there have been many instances globally of post
offices transforming themselves into banks. For instance, Germany’s
Deutsche Postbank, originally a postal bank, is currently a private
retail bank. In Japan, a large bank is run by its postal service but
this is likely to be privatized next year.
Under the present scheme, there will be no conversion of any of the
current activities of India Post for the payments bank. While the postal
savings bank arm of DoP will continue its business, IPPB will come up
as a new bank ostensibly for providing payments services to the masses
in the hinterland. Indeed, India Post and IPPB will primarily cater to
the same group of customers but the customers will have a choice—whether
to continue to bank with India Post or go to IPPB for their savings
deposits. Of course, the limit for a savings deposits in a payments bank
is capped at Rs100,000.
IPPB is entirely owned by the government of India and will be run
independently by a professional management even as DoP plays the role of
a mentor.
Too Many Suitors
A Mint 12 January report (bit.ly/2hrDHEL) said
IPPB was the “hottest game in town” and that 50 entities, including
International Finance Corp., Barclays Bank, Deutsche Bank AG, Citibank
NA and several state-owned banks have sent proposals to DoP for
different kinds of partnerships. Going by the report, banks, insurance
firms and asset management companies have been approaching IPPB to form
equity partnerships, joint ventures and many other mutually beneficial
arrangements.
None should be surprised by the enthusiasm that IPPB is generating.
After all, DoP has a network of 154,939 post offices, the largest such
network in the world. Its beginning can be traced back to 1727 when the
first post office was set up in Kolkata. (The current postal system came
into existence with the Indian Post Office Act of 1854.) As of 31 March
2015, 90% of the post offices were located in rural India—on an average
8,354 people are served by one post office, which covers 21.22 sq km.
IPPB has tremendous possibilities as it can bring millions of
individuals and small businesses into the formal banking channel by
offering savings accounts of up to Rs100,000 and current accounts with a
special focus on micro, small and medium enterprises, small merchants,
village panchayats, self-help groups, etc. It can also be the vehicle
for the direct benefits transfer of social security payments of various
ministries and pay utility bills, beside taking care of payments of
various central and state governments and municipalities as well as
colleges, universities and other educational institutions.
It can also play a major role in remittances—both domestic and
cross-border—with a special focus on migrant labourers, low-income
households and, finally, distribute third-party financial products such
as insurance, mutual funds, pension and credit products.
The post office savings bank has a customer base of at least 330 million
and the outstanding balance under all post office schemes were at least
Rs6.19 trillion (in March 2015). Clearly, with its network, it can give
India’s largest lender, the State Bank of India— which, after the
merger of all its associate banks with itself, will become one of the
top 50 banks globally in terms of assets—a run for its money.
Technology is Key
The key to the success of IPPB will be its business plan and if that’s
in place, technology. In October 2009, DoP awarded a 45-month
information technology (IT) modernization contract to Accenture to
design a new enterprise IT architecture and migrate the DoP to a more
efficient, reliable and user-friendly IT system. Tata Consultancy
Services Ltd bagged the contract for an end-to-end IT modernization
programme to equip India Post with modern technologies and systems to
enable it to offer more services to a larger set of customers in an
effective manner. Infosys Ltd was employed to put in place the so-called
core banking solution as well as constructing a rural connectivity
network.
The India Post website says that in November 2012 the government
approved a Rs4,909 crore IT modernization project for DoP for
transforming DoP into a technology-driven department. While Accenture
came in early, TCS and Infosys were awarded the projects in 2013.
I understand, till now none of projects have been completed. There have
been glitches galore in the core banking solution while the rural
network is only partially done even as the back-end work of TCS remains
incomplete. There have been disputes and disagreements with the service
providers and, in a few instances, even penalty provisions for delayed
delivery have been invoked.
The 2015 annual report of India Post says the entire project is in
implementation phase and also outlines the achievements made so far,
which include computerisation of the north eastern region, establishment
of a data centre and a disaster recovery centre and networking 27,736
departmental post offices, rolling out core banking solution in more
than 17,000 post offices, and setting up 500 ATMs, among a few other
things.
Clearly, not even half of the technology work has been done. So, how
will IPPB revolutionalize India’s payments system? At the initial stage,
EY helped DoP to prepare the project report for the bank, based on
which the in-principle licence was given. Now, Deloitte Touche Tohmatsu
India LLP is advising IPPB for setting up the bank. According to
communications and information technology minister Ravi Shankar Prasad,
IPPB will have 650 branches. They will be located at all district
headquarters across India and connected to 155,000 post offices.
The Hub and Spoke Model
This is a typical hub and spoke model with one major difference —the
IPPB branches or control offices will be the back office while the post
office branches which, for all practical purpose, will play the role of
business correspondents for IPPB, will be its front office. Every post
office branch will host an IPPB desk to source business.
To make this model successful, it needs to have the right technology. I
understand that DoP floated a request for proposal (RFP) to invite bids
from various companies in July. For any large, complex project, an RFP
is considered to be the heart and soul of the procurement. If the
software firms are to be believed, there were a few thousands of queries
by the initial bidders but only one entity, Polaris Financial
Technology Ltd, made a bid which got cancelled. A fresh RFP has been
recently floated but I am not aware how many bidders it has attracted.
The cost of the project could be as much as Rs600 crore.
Typically, it takes at least a couple of months to evaluate the bids and
then another six months to implement the project. If IPPB wants to
launch its payments bank in January, how will it get the technology
platform? Certainly, it cannot use the unfinished technology
architecture of DoP. The only option left before it is to tie up with a
bank for the time being for using the IT infrastructure till its own IT
backbone is in place. Only the State Bank of India has the capability to
support IPPB but will the nation’s largest lender extend a helping
hand? I doubt it, as IPPB will directly compete with the State Bank.
Probably, IPPB will explore a tie up with Punjab National Bank, majority
owned by the government. It is large and is based in Delhi. If indeed
such an arrangement is worked out to launch the bank even before its IT
infrastructure is ready, this will be a unique instance of a bank launch
in India.
In fiscal year 2015, India Post generated Rs11,636 crore in revenue, 8%
higher than the previous year and its total gross expenditure was to the
tune of Rs 18,557—11.6% higher than 2014. Post recoveries, the deficit
was Rs6,259 crore, 14% higher than the previous year. A look at the
average cost and average revenue of the most popular 18 items sold by
India Post reveals that only two of them are profitable—competition post
card and letter—and all the others, including the money order business,
which charges a hefty fee, are losing money.
IPPB can make a new beginning only if it is run as a business entity and
not a government department. Till now, a CEO has not been appointed
(Vinod Rai of the Banks Board Bureau is in the process of identifying
one). DoP has asked the public sector banks to recommend senior
executives for responsible positions at IPPB but I am not sure how the
response has been. Meanwhile, the Institute of Banking Personnel
Selection has been looking around to recruit around 3,000 people.
Even if the business strategy and the right kind of people are in place
for the launch, the technology will hold the key to the success of a
payments bank. With its phenomenal reach across India, IPPB can do
wonders—geo-mapping every inch of the country and making every kirana
store, petrol pump, mandi its
business correspondent, and usher in a revolution in the payments space
when the government is pushing hard for a digital economy.
In his Independence Day speech at the Red Fort, on 15 August 2016, Prime
Minister Narendra Modi said the Post Office is an example of our
identity. “If any government representative gets the affection of a
common man in India, it is the postman. Everyone loves the postman and
the postman also loves everybody... We have taken a step to convert our
post offices into payments banks. Starting with this, the payments bank
will spread the chain of banks in the villages across the country in one
go.”
Love for the postman alone cannot make IPPB a success, it needs to do much more.
Tamal Bandyopadhyay, a consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.
His Twitter handle is @tamalbandyo
Comments are welcome at tamal.b@livemint.com
source:www.livemint.com
