Wednesday, May 15, 2013

Why India Post should get a banking licence

Dear Comrades,

India’s central bank is set to open doors to a set of private and state-run entities in the banking space in Asia’s third largest economy. The objective behind doing this, almost a decade after companies were last allowed to float banks, is the so-called financial inclusion or expansion of banking services in a nation of 1.2 billion people where 40% of the adult population still does not have access to banking. If the Reserve Bank of India (RBI) were to choose one state-run entity to do so, it should be 159-year old India Post. It had 154,822 branches across the country as on 31 March, the latest data available, the largest for any postal department in the world, and close to 90% of them—139,086—are in rural India. This is more than four times the rural branches of Indian banking system. As of June 2012, there are 165 banks in India, including 82 regional rural banks, and collectively they have a branch network of 92,117. Roughly 36% of it, or 33,367, are in rural pockets.

On top of this, India Post has 573,749 letter boxes strewn around the country. Imagine a situation where these letter boxes are doubling up as cheque collection boxes; there will be a dramatic change in the banking landscape in India. Using its network, India Post is capable of doing door-step banking even in remote villages, pushing moneylenders out of business. On an average, a post office serves an area of 21.23km and covers 7,817 people. In contrast, a bank branch serves around 13,000 people.

When it comes to number of accounts, India Post, however, lags behind the banking system. It has some 238 million savings accounts against the banking system’s 810 million accounts but it’s much more than what any bank in India has under its fold. The outstanding balance in all its accounts is little over Rs.6 trillion, more than half of the deposit base of the country’s largest lender, State Bank of India, and more than double of India’s largest private lender ICICI Bank Ltd’s deposit liability. The banking system’s deposit base is around Rs.68.4 trillion.

Apart from mobilizing savings through various schemes, India Post also sells mutual funds and pension products and offers remittance service from 205 countries across the world through 9,751 post offices. It has tied up with Western Union Financial Services Inc. and MoneyGram International Inc. for this. The government also uses post office accounts to route payments to beneficiaries as part of the rural jobs programme and the direct transfer of subsidies. The money raised by India Post goes into the so-called consolidated fund of India. In other words, they are part of the government’s public debt.

With this background, India Post should be the fittest candidate to establish a bank if indeed RBI wants financial inclusion, as no other public or private entity can compete with it in terms of reaching out to the rural masses. It is familiar with the art of deposit taking; has personalized relationships with rural folks who do not yet have access to Internet; and even though it does not directly invest in government bonds, it will not have any problem in fulfilling the statutory requirement of buying government bonds as it has been contributing to the consolidated fund of India. All it needs is to convert part of it into exposure to government bonds. Besides, it also has the infrastructure in place for distribution of financial products.

The argument that can go against it is its Rs.6,346 crore loss in fiscal 2012 as its business dropped, with emails denting people’s letter-writing habit and private courier firms taking away its market share. If it cannot hold on to its own business, how can it run a bank? The main reason behind the loss is not erosion in market share but the heavily subsidized services that it offers in rural India. The subsidy varies between 66.66% in a normal rural pocket and 85% in hilly, tribal and dessert tracts and remote villages. One would imagine that the bank will not be forced to offer subsidized services under the so-called universal service obligation.

If it is allowed to run its banking operations only under commercial considerations, it is bound to succeed with its existing customer base, branch network and reach and expand banking services to every nook and cranny of the country, which no other entity can do.

The biggest asset of India Post is its customer base and branch network, which any bank would have loved to own. Globally, commercial banks always eye the postal department’s network, which comes in handy for reaching out to retail customers. In 2010, Deutsche Bank AG took over the control of Deutsche Postbank AG by raising its stake. Through this, Deutsche Bank added Postbank’s 14 million customers to its 10 million German private clients to become the country’s biggest private sector retail bank. Headquartered in Bonn, Postbank was formed following the restructuring of German postal services in 1990.

As both the RBI and Indian government are keen on financial inclusion, India Post could be a vehicle to do so, provided the government allows it to have a professional management with expertise in banking and skill in technology. If its lack of banking experience comes in the way, India Post should tie up with a corporate entity and jointly seek the banking licence. State-run insurance behemoth Life Insurance Corp. of India (LIC) in 2001 had raised its stake in the Mangalore-based Corporation Bank from 12.26% to 27.02%. By doing so, LIC could start selling its insurance policies through the public sector bank and Corporation Bank started using LIC’s 3,000-odd branch network. India Post could do much more for spreading banking services.

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