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.
Source : http://www.thehindubusinessline.com/
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