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Saturday, March 30, 2013

If India Post can run a bank, so can anyone with land

No matter how many times a bad idea is killed in India, it has a way of resurfacing in some form or the other. Despite being shelved several times over the last two decades, the idea of a Post Bank of India never dies a complete death. It is re-emerging, this time riding the catch-all justification called "financial inclusion".

That even a business-literate newspaper like The Economic Times is now championing the idea is indicative of the inherent attraction of the flawed your-beauty-and-my-brains logic. Hey, I have 1.55 lakh branches, and you need financial inclusion. So make me a bank.

In an editorial today , the pink daily says: "India Post seldom figures in the list of those reportedly vying for a bank licence, but its credentials fit the bill almost to a T. Consider. A prime reason for issue of new bank licences is financial inclusion. By that criterion, India Post is an automatic choice. With close to 1,55,000 offices, a majority of them in rural and semi-urban areas, and 30 crore deposit accounts, India Post can do what commercial banks have tried to over the years, but with limited success."

Look at the logic closely and what the editorial is saying is this: India Post has a lot of real estate in villages and financially excluded places, It is already taking in deposits, so it is ready to become a bank.

If it were that simple, any retailer with real estate in the right places should be ideally positioned to become a bank. How about Bata as a semi-urban bank? Why not every rural police station? Even better, they could guard the cash better. There are lots of kirana stores in rural areas. Why not give them a bank franchise?

We have to look at the real reasons that are driving this proposal to debunk the idea.

One, India Post is making losses. So we need a bank to bring in the profits. In this financial year, losses could top Rs 6,800 crore .

Counter-argument: If you can’t run your existing business well, and costs escalate independently of revenues, how are you going to run another business (banking), which you know nothing about, well?

Two, India Post's core business delivering letters and parcels is gutted. This is because the profitable part of the business has been taken over by private couriers. So India Post needs a new business to run. So why not banks?

Counter-argument: If your main business is a losing proposition, you either need to shut it down or seek a new idea that is contiguous to it. If no one is writing letters, why not convert post offices into cyber cafes, which print email? If email is the new postcard, why not make email and letter-printing the new business of rural POs? This may not bring profits, but will at least cut down losses. But there could be even better ideas for leveraging India Posts people and real estate.

Three, India Post is overstaffed. The department of posts has 4,87,621 people employed in it and it plans to spend over Rs 10,900 crore on them in 2013-14. A bank will presumably soak up some of the excess staff.

A modern bank needs completely different manning and automation levels, and if these skills are available more in urban areas, you won't be able to get competent people to serve time in villages

A modern bank needs completely different manning and automation levels, and if these skills are available more in urban areas, you won't be able to get competent people to serve time in villages.

Counter-argument: There is no way bureaucratic post office personnel can become modern bankers, at least not all of them. A modern bank needs completely different manning and automation levels, and if these skills are available more in urban areas, you won't be able to get competent people to serve time in villages. The answer to overstaffing is not a new business, but humane forms of retrenchment.

Four, there is the financial inclusion argument we talked about right at the outset.

Counter-argument: Financial inclusion does not mean you become a bank. You can team up with an existing bank or many banks and make them pay rent (or share profits) for the space they occupy in rural post offices. This is a risk-free way to leveraging 1.55 lakh post offices for financial inclusion.

Five, there is the point that post offices anyway run deposit schemes, so why not make them give out loans as well? Like a full-fledged bank?

Counter-argument: Post offices are very poor at servicing customers. Check with any post office and find out who likes doing business there. People are forced to go there only because that is where tax-saving schemes like NSCs and post office monthly income schemes are sold. Also, it is easy to stash black money in post office savings schemes.

Six, other countries have done it. Germany has a post office bank, and so does Japan. So why not India Post?

Counter-argument: These countries set up their post banks long ago, and they also have better standards of governance and accountability. We don't. Somebody doing something does not automatically mean we should do the same.

What post offices may be competent at could be taking in deposits. There may thus be a case for giving them a licence to become deposit-taking institutions, without lending operations. This is way short of making the post office a bank. Lending needs different skills including money management, risk assessment, and the ability to monitor credit accounts on a continuous basis. Post offices have no such skills.

However, if one accepts that even public sector banks have not been particularly good at managing bad loans, and tend to lend money under political pressure, post offices will be even more vulnerable since they will be operating in rural areas where thugs and rural vested interests operate. Unlike nationalised banks, many of which are listed, an unlisted Post Office Bank of India will be continually under political tutelage. What we will end up creating is yet another institution that soaks up capital from the exchequer without any kind of public accountability.

So what are the best options?

The best option is for the post office to team up with banks in specific regions either for a fixed annual payment or even for free (government owns post offices and banks, after all). If Bank of India teams up with all post offices in Maharashtra to set up branches, you will automatically have rural inclusion and better banking sense.

The second-best option is to allow the Post Bank of India to become a "narrow bank" one that only takes in deposits, does limited cash management, and invests wholly in government bonds but does no commercial lending that can result in bad loans. This way returns will be lower, but if financial inclusion is the goal, lower returns will be acceptable. There will also be no risk of frequent government bailouts or huge capital infusions every other year.

But as far as the depositor is concerned, it will be a real bank which issues cheque books, and allows people to draw or deposit cash.

The worst option is to make Post Office Bank a real bank. It will be a permanent albatross around the taxpayer's neck.
Source :, 26 March, 2013

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