Saturday, April 5, 2014

Why RBI’s decision on a Post Bank of India is a slap for Finance Ministry

Dear Comrades,

The RBI’s decision on Wednesday to “consider” the application of Department of Posts for a banking license “separately in consultation with the Government of India” is literally a slap in the face for the finance ministry. Out of the 25 applicants that were in the fray for a new license, the RBI granted “in-principle” approval for two - IDFC and Bandhan Financial Services - while setting aside the application of the Department of Posts to be decided separately. If the finance ministry had given permission earlier, the RBI could have issued a license to the Department for “Post Bank of India” as well. While prior clearance of their parent company was necessary for the private players who had applied for a license, for the postal department, it was the clearance of the government of India, or more specifically, the finance ministry that was mandatory. Without such a clearance, the RBI could have rejected the application, which it didn't do. Had the government given its clearance, most probably the Post Bank too could have commenced its operations along with the other two licensees. Representational image of a post office in India. AFP The Department of Posts has been trying to get the clearance of the finance ministry for some time now, but for some strange reason, the finance ministry has been dragging its feet. 

According to knowledgeable sources, the RBI was very keen and has even met with the ministry, but nothing fructified. It was clearly a case of the government defeating its own proclaimed aim of financial inclusion. There is no other institution, not even the network of public sector banks, that could help financial inclusion in a way that the the postal department is capable of. If the Post Bank of India is operationalised, 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 for NREGA beneficiaries, it was this network that came to its rescue. About 2.2 crore people get their NREGA payments through the post offices. 

Financial services are not new to 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. This is where the finance ministry’s role is suspect. Why hasn’t it granted the permission to the Department of Posts when the RBI doesn’t have any objections. 

Who is it trying to protect? Isn’t it its commitment to financial inclusion a sham? Interestingly, Kapil Sibal, the minister for posts, and even Rahul Gandhi couldn't get a government decision favouring the Postal Bank. Sibal reportedly was very keen while Rahul Gandhi, as usual, had his attention diverted. 

As the RBI press release notes, financial inclusion was the stated objective for giving additional banking licenses. "In the budget speech of the Union Finance Minister for the year 2010-11, it was announced, inter alia, that there was a need to extend the geographic coverage of banks and improve access to banking services and that RBI was considering giving some additional banking licences to private sector players,” the central bank said. Why was the most eligible candidate excluded? Anyway the RBI has a mind of its own and has apparently not given into the government’s indifference. 

It has kept the option of the Postal Bank open and will follow up with the financial ministry. How long will the ministry block it? Will the next government take a favourable decision? The reasons are certainly more than what meets the eye.

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