Prof. Ravindra Dholakia

 

The Reserve Bank of India (RBI) recently gave a licence to India Post to function as a payments bank. Does it change anything for the people? Post offices in India have already been working as payments banks. Individuals open accounts, deposit and withdraw money by cash or cheques and receive payments through them. All these transactions are meticulously recorded manually in their passbook. Post offices do not provide any loans or carry out any credit transaction. This has been in operation for more than a century and much before the RBI came into existence. So, what would change after the RBI’s licence?

The Department of Post (DoP) had earlier applied to RBI for a banking licence for its fully-owned subsidiary, India Post. The DoP’s assets and liability position, as revealed by its balance sheet, was far from satisfactory for RBI’s comfort to allow the grant of a banking licence to the parent organization. Its annual deficit kept increasing from Rs.5,339 crore in 2013-14 to Rs.6,378 crore in 2014-15 to Rs.6,665 crore in the budget of 2015-16. As a result, the banking licence had to be granted to a separate entity, India Post, with distinct assets and liabilities of its own. The RBI’s licence for payments bank to India Post should, therefore, separate the banking business from various other services provided by DoP, which may or may not run on a commercial basis. A commercial focus on the banking business is desirable for viability and efficiency.

However, with RBI’s licence comes the condition that India Post cannot accept deposits of more than Rs.1 lakh per account. Earlier, DoP had a self-imposed constraint of not allowing group or institutional accounts, official capacity accounts, or security deposit accounts. The payments bank licence has formalized this constraint. If DoP decides to transfer its entire banking business to India Post, it may face issues in cases where accounts have deposits in excess of Rs.1 lakh. There are several such accounts. As a result, there will be a parallel business being conducted by DoP for large accounts and by India Post for other accounts, creating inefficiency and confusion. Therefore, restricting deposits to Rs.1 lakh per account will hamper the efficiency and viability of the business.

Concerns expressed by public sector banks (PSBs) about increasing competition for their low-cost current and savings deposits on account of payments banks are entirely misplaced because DoP was already in this business before, nor would other payments banks make things worse for PSBs. Payments banks cannot pay high interest on their deposits because they have to maintain 75% of their deposits in government securities, where the interest would be about 7-8%. Since their cash requirements would be higher—given the nature of their accounts—the remaining 25% cannot fetch higher returns. On the contrary, RBI’s insistence on charging ATM withdrawals and imposing absolute limits on deposits per account may discourage people from doing business with payments banks. The insistence on charging an ATM fee may even be socially undesirable because ATM withdrawals from payments bank accounts would be typically for petty sums. Any charge to recover the cost of operating ATMs would be highly regressive.

If the payments bank of India Post enters into a business relationship with any established commercial bank, RBI’s approval will be required. There is no gain for either DoP or India Post when commercial banks directly use the services of post offices as business correspondents. The current measure of granting payments bank status only to India Post is not likely to make any difference to any stakeholder.

What could have made a substantial difference? A bold and aggressive approach on the part of RBI would have gone a long way to create an impact on financial inclusion. Opening a bank account is only a necessary condition to achieve financial inclusion. The sufficient condition is to ensure that all needy households get adequate institutional credit and appropriate insurance cover at affordable costs. In remote rural areas, the only extensive network with enough experience in financial matters is the network of post offices and postmen. As against a total of less than 40,000 branches of all scheduled commercial banks, DoP has a network of 140,000 post offices in rural areas. On an average, a post office serves 8,100 persons six days a week. Such an extensive and intensive network gives it a unique advantage in reaching the last mile to deliver any financial service. The report submitted by the Taskforce on Leveraging Post Office Network provided concrete measures for taking advantage of this network.

It would have been desirable if India Post was allowed to provide limited loans to its rural clients for meeting their productive needs. If there were concerns about risk of default, the amount of the loan could be restricted to Rs.50,000 or Rs.1 lakh as per case. There could be an appropriate conditionality for subsequent loans to the same person. The experience of such commercial banking for a couple of years would have enabled India Post to improve its operations and become a major player in rural areas. It would then prove to be an effective instrument for financial inclusion. In short, an organization like India Post with access to the vast network of post offices should have been considered not only as a payments bank, but also as a bank with limited credit operations to address the national goal of financial inclusion.

Moreover, DoP already provides postal life insurance, which was introduced way back in 1884, and rural postal life insurance, introduced in 1995. If another separate corporate entity can be hived off from DoP to offer all insurance products on commercial terms, it has the potential to expand its product portfolio, including crop insurance and health insurance. Again, the network of post offices can be tapped effectively to extend such crucial financial services to the neediest but underserved segments of rural India.

Similarly, other commercial activities of DoP such as e-commerce, distribution of third-party products, e-services and provision of various government services should also be hived off into separate subsidiaries with independent boards of directors. The traditional mail operations and remittances constituting the basic communication services that the state is expected to provide to the people should continue to be with DoP as a departmental undertaking of the central government. A corporate structure for DoP may allow different wholly-owned subsidiaries to carry out specific commercial activities, utilizing the network of post offices on a rental basis. This would enhance the quality of services provided with cost-efficiency and commercial viability.

All this would require the Postal Act to be amended or ideally, rewritten. In any case, the RBI’s licence for a payments bank to India Post will need the Act to be amended. It is still not too late to consider a total revamp of the Act for restructuring DoP along the lines suggested in the taskforce report. If RBI is too defensive and too slow to act, the government can push these reforms in the postal department by amending the Postal Act.

 

Ravindra Dholakia teaches economic environment and policy at IIMA. He was a member of the Government of India’s Taskforce on Leveraging Post Office Network. He was also a member of the Sixth Central Pay Commission.

The article presents the author’s personal views and should not be construed to represent the institute’s position on the subject.

 

First published in 'View from IIMA' column in Mint.