Tuesday, March 11, 2014

Why the Finance Ministry is blocking Post Bank of India?

Dear Comrades,

Inclusive growth is the buzzword that Sonia Gandhi, Rahul Gandhi and the apostles of Sonianomics brandish at every possible opportunity, but when the world’s greatest opportunity for financial inclusion knocks at the their door, they look the other way.
The opportunity comes in the form of a private bank of the India Post, which has 1.54 lakh branches across the country, 90 per cent which are in rural areas. The Reserve Bank has approved the idea, but the finance ministry is trying to block it.
Out of the 27 applicants (only 25 in the fray now) for a new banking license, the Indian Post’s bank is among the five or six that has passed the strict guidelines of the Reserve Bank. While other licensees can start their operations once the Reserve Bank announces their clearances, the Indian Post’s bank cannot because the finance ministry mandarins don’t like the idea.
Is there any particular reason that even with a Reserve Bank license an arm of the government of India cannot start something that will help tens of millions because another arm has a say over it?
The only motives that one can assume are the following.
1. Bureacratic ego of the finance ministry: officers of the finance ministry think that they are of a higher class than the officers of the humble postal department. It’s simple arrogance of one ministry over another
2. Turf issues : Banking operations are overseen by the Department of Financial Services (DFS) in the finance ministry. Why should the postal services, whose job is to deliver post, should get involved in financial services or banking?
3. Possible collusion with the public sector banks: DFS officials are on the board of these banks, which may want to prevent competition from such a massive network. Nobody can match the infrastructural strength of the postal services, particularly in the rural areas.
India Post has the widest reach in the nation
India Post has the widest reach in the nation
Let’s take a look at the possibilities of the proposed bank of the postal services called the Indian Post Bank.
Once operational, all the 1.54 lakh post offices, out of which about 90 per cent are in rural areas, by default will become a “bank”. These “banks” will be more accessible to the common people, because they have been right there for decades in their neighbourhood: there is a post office for every 7176 people in the country and in rural areas, the coverage is even better - one for every 5682 people.
In fact, when the UPA government was struggling to find a way to transfer the wages of NREGA beneficiaries, it was this network that came to its rescue. About 2.2 crore people get their NREGA payments through post offices.
Financial services are not new to the post offices because for several decades, they have been running the post office savings scheme. Besides the extremely high penetration of the post offices, in rural areas, there are about 2.69 lakh agents (Grameen Dak Sevaks) who come home to help people with banking.
Almost all these agents are also people from the neighbourhood and are familiar with the beneficiaries. It is a unique banking eco-system that only Indian Post can claim credit for. It is a model that has evolved over time and is very hard to replicate because it is driven by the sheer needs of people, and nourished by trust and relationships.
It’s impossible to find another system, than the Indian Post, that has such penetration and coverage anywhere in the world. Unarguably, there is no other network of such scale.
At present, the post office savings banks are only about savings and do not offer credit and other services which are essential to make them real banks, and work more inclusively. The main idea behind the Post Bank of India is to make available the entire range of banking services.
Now let’s look the financial muscle of the post banks savings scheme as it exists today.
The savings banks scheme has a whopping cash balance of about Rs 6 lakh crore and about Rs 22.5 crore accounts. It also includes more than a million of senior citizens’ savings schemes. The most striking part of this is that 89 per cent of it serves the country’s rural areas. Significantly, all this money is lent to state governments (its main source of public borrowing) and not to loss-making airline companies.
The postal system also runs a low-premium Postal Life Insurance scheme serving about 1.69 crore people. In the last two years, the Department has invested about 10-20 per cent of the premiums in mutual funds with considerable success. Its portfolio managers are as good or better than that of the regular banks.
How will the Post Bank of India work?
For the Post Bank of India, the postal department will set up a non-operating financial holding company which will float the bank, which will be a private entity. it will have about 150 branches for which the head post offices will be a correspondent. The access of the network will go all the way down to the neighbourhood post office. The bank will have various products and services that will strengthen financial inclusion.
The idea, for which everything is ready, is about real financial inclusion that the existing banks will never be able to achieve in near future. All that it requires from the government is an investment of Rs 700 crore.
Reportedly the RBI governor Rahguram Rajan will meet with finance minister Chidambaram before announcing the licenses. If Chidambaram raises his ministry’s objection, Rajan will have to either drop the license or defy the government, although the latter is quite unlikely.
Sonia and Rahul, are you listening?
According to sources, Rahul Gandhi had been briefed about situation and he had promised action, but as in other cases there was not enough follow up from him.
If Rahul and Sonia are really keen about financial inclusion and inclusive growth, it’s time that they intervened and broke one more silo that’s preventing people-friendly policies and programmes. Blocking the Post Bank of India is patently anti-people.
If they don’t do it, it will be a fantastic opportunity for the next government to make an impact. Perhaps, the BJP should take notes too.
(Editor’s note: some text from an earlier report has been used in this story)

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