India Post: Private sector bank?
On July 1, 2013, the Reserve Bank of India (RBI) released the list of 26 applications received for new private sector bank licences. Those applications which meet all the criteria set out in the guidelines and are squeaky clean should automatically be granted bank licences and as such there should be no rationing. While there is discussion on applications from industrial houses, non-bank finance companies and long-term financial institutions, what has gone unnoticed is the application by the Department of Posts for a private sector bank licence.
Spread of the postal system
The postal system has an unmatched geographical spread of 155,000 offices, of which 90 per cent are in the rural areas. In contrast, the scheduled commercial banks have only 75,000 branches, of which less than a third are in the rural areas. Given the avowed commitment to inclusive growth, financial inclusion is a necessary concomitant and given the spread of the postal system, any successful financial inclusion will necessarily involve the active participation of India Post.
The idea of a postal bank is not new. It was first mooted by S Venkitaramanan, the then finance secretary, and again in 1992, when he was Governor, Reserve Bank of India (RBI). Over the years, the post office system did undertake limited banking activity. Post Office Savings Bank Deposit Accounts are widespread and did provide for checking facility. Also there is an array of term deposit and other savings schemes, such as Public Provident Fund, the Senior Citizens' Monthly Pension Scheme etc. An important difference from banks is that India Post does not manage the funds it garners. All collections are credited to the government account and all payments are made from the government account. Since the outstandings increase over time, the government invariably ends up with a net surplus of inflow of funds. This cosy arrangement suited the government and hence, any proposal to enable India Post to evolve into a full-fledged bank, has been aborted by the Ministry of Finance.
One of the main arguments against setting up a postal bank is that in the year in which it is set up, there would be a very heavy drain on the fisc, which just cannot be managed. This is a red herring. It is possible to work out a smooth transition without materially affecting the fisc.
First, for all term deposit liabilities of India Post, as on the date immediately prior to the setting up of the India Post Bank, these liabilities would be the liability of the government and the India Post Bank would draw on the government to meet these liabilities. Any fresh term deposits liabilities would be the liability of the India Post Bank and the fresh funds would not be transferred to the government.
Secondly, for all outstanding pre-zero balances in the Savings Bank Deposit Accounts before the setting up of the India Post Bank, the government would pay off the full liability to the Indian Post Bank. To avoid a sudden pressure on the fisc, the payment would be via Special Securities, with an array of maturities, ranging from a few days (Treasury Bills) to long-dated paper. These Special Securities could carry a rate of interest, of say one per cent above the current Savings Bank Deposit rate, to allow for any future increase in interest rates. This will ensure that the drain on the government would be minimal.
Thirdly, the bulk of fresh receipts of the India Post Bank would be, initially, invested in government paper-following a Narrow Banking model i.e. credit disbursements would be very limited, and the bulk of funds would be invested in safe investments, such as government securities. Commensurate with the development of investment skills, the India Post Bank would invest a part of its funds in bank Certificates of Deposits (CDs), Commercial Paper (CP) and other money market instruments. The India Post Bank would very gradually get into lending activities, as it develops lending skills, but essentially, for very small loans. The India Post Bank would have the inherent advantage of knowing the local population, which would help it in making appropriate credit decisions. There would need to be sufficiently strong safeguards to ensure that the postal funds are not used for behest lending (lending dictated by considerations of political largesse).
Structuring of the India Post Bank
How would the India Post Bank be structured? As per the RBI guidelines, there would be a 100 per cent sponsor-owned Non-Operative Financial Holding Company (NOFHC), which presumably would be owned by the government. The India Post Bank would need to quickly become an incorporated entity. The sponsor would initially invest 40 per cent of the paid-up capital of the Bank and this investment would be locked in for five years. Thereafter, the sponsor's share in the capital would be brought down, in accord with the RBI guidelines. The balance 60 per cent of the capital would be subscribed by the private sector by a number of investors to ensure that no single holder has a predominant holding. As stipulated in the guidelines, the new bank would need to approach the market for funds and this would ensure that the India Post Bank becomes a widely held company.
Location of offices of the India Post Bank
To derive economies of scale, the new bank should operate out of the premises of the existing post offices. While the India Post Bank cannot be expected to set up 155,000 branches, the conversion of the existing offices into branches could be phased. In the initial stage, of say three years, about 10 per cent or 15,000 offices could be converted into full-fledged bank branches. As all the 155,000 post offices have some rudimentary postal bank activity, the balance of offices should be converted into extension counters with a mother branch, and as each extension counter gathers a certain threshold level of activity, it could be converted into a full-fledged branch.
Human resource development
The India Post Bank will need to recruit critical personnel on commercially competitive terms. What is, however, important is that the staff of the new bank will need to have familiarity with their locale and in a sense they would be 'barefeet bankers', who would have inherent skills in handling the local population.
Successful financial inclusion contingent on efficient India Post Bank
It is imperative that serious efforts are made to successfully launch and operate the India Post Bank. The top leadership of the country should unequivocally support the proposed India Post Bank, to obviate negative bureaucratic brilliance scuttling the proposal. Much of the fulfilment of the aspirations of the masses is contingent on how the new India Post Bank evolves. When the postal giant awakes, the rest of the financial system will quiver at the thought of the oncoming competition.
Please Note: This article was first published in The Free Press Journal
on July 15, 2013. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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