Saturday, April 19, 2014
A PRESS NEWS
17.04.2014Why not a ‘Post Bank of India’?
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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.
Long
haul: 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.
Potential: The RBI in its communication on
licensing banks has indicated that India Post’s application will need to be
examined and processed on a different footing.
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.
History: 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.
Apprehensions: 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 remunerated.
Capital: 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 desirable.
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.
Investment skills: 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.
Financial inclusion: 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 the masses.
The
writer is an economist
(This
article was published on April 17, 2014)
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