The decision of Indian Postal Department to seek a Banking license from RBI through the Licensing Scheme meant for private sector has been an object of discussion since the announcement was made. The application is a source of embarrassment to RBI which now has the challenge of deciding whether to grant a license to Indian Post or not as a traditional Bank.
There have been many positive reviews by experts indicating why Indian Post deserves a Banking license. However, I am personally not convinced that it is a good idea for Indian Post to become a “Commercial Bank”. In fact Indian Post has a greater future by simply modernizing its traditional services rather than becoming a Bank. By converting itself into a Bank, India will lose a great digital post service that can be developed by only the department of post and not by any other entity in future.
Let me present some of my preliminary views in this regard so that E&Y instead of advising the Postal department to convert itself into a Bank can work on how to modernize the postal system into a “Digital Postal System”.
To start with, we can recognize that the Postal department is today a department of the Government of India which meets its costs from out of the Consolidated Fund of India. It is stated that in the fiscal year 2012, it suffered a loss of Rs 6346 crores. Had it not been debited to the consolidated fund of India, perhaps the Postal department would be considered as a “Sick” company and wound up.
Post offices accept Savings Bank accounts, Recurring deposits, Time deposits and also sells long term investment instruments. The deposits in the system are stated to be in the region of Rs 6 trillion (600,000 crores) . It is therefore the largest Bank in the country as regards deposit mobilization. It has over 150000 offices with nearly 89% of them in rural areas making it the largest institution in financial services across the country.
If the department needs to obtain Banking license then the “Banking Arm” has to be carved out as a “Public Sector Company” and run as a “Profit Center”. It cannot enjoy the benefit of “Money on tap” from the Government and has to earn money out of lending operations. It needs to also maintain SLR and CRR on the deposits.
From the depositor’s angle, the rates of interest paid by the Post office today may go down in the Banking arm. Secondly, the deposits which now have an “Unlimited Deposit Insurance” will come under the limited guarantee scheme of the DICGC. Hence the deposit products of the Indian Postal Bank would be inferior to the current products of the Indian post office.
If this inferior product is offered with the current service levels of the Postal department vis a vis an ICICI Bank or a Kotak Mahindra Bank, it is not possible for the Indian Postal Bank to retain its current customer base of around 23.8 crore customers (Savings Bank).
What will therefore happen is that the postal department will have to continue its operations in the present form while its own sister organization will cannibalize into its present activities. As a result the department will continue to carry the unprofitable part of its operations which has resulted in the loss of Rs 6436 crores in 2012 and will also be burdened with commercial competition from its Banking arm to wean away profitable niche of the current business portfolio.
At the same time, the need to undertake “Lending” as a new activity will create a complete upheaval in the system. At present the manpower in post office is not geared towards any lending activity and hence it has to borrow the entire lending portfolio from outside.
The proposal therefore is neither good for the Postal department nor is rosy for the Banking subsidiary. It would be beneficial for both the Postal department and the Banking industry as well as for the people if Indian Post continues to be “Deposit only Institution” backed for repayment by the Government of India.
The Banking subsidiary of the postal department will essentially be a Government owned Bank much like the REPCO Bank presently owned by the Ministry of Home Affairs (as a Society). This trend of each ministry having a Bank of its own is unhealthy from the point of view of a central regulator like RBI.
Once an Indian Postal Bank comes into existence, its staff mostly drawn from outside will be in a higher remuneration package compared to the existing employees. The existing employees in rural areas will end up doing all the dirty business as agents of their Bank counterparts who will be entrenched in the district head quarters in air conditioned chambers. Sooner or later this will give raise to a huge HR conflict and makes the entire business unviable.
We now have the example of Air India and Public Sector Hotel businesses suffering from the competition fuelled by sell out from within by corrupt politicians. The fate of Indian Postal Bank cannot be different. We can therefore anticipate that the risk of failure of the Indian Postal Bank is relatively higher than in the case of any other private sector owned Bank.
It must be remembered that “Risk of Failure” is inherent in every financial business and hence it cannot be eliminated in Banking. We can only take precautions so that risks are identified at an early time and mitigated before it becomes unmanageable. From the RBI’s point of view, risk management strategy within the banking system is better administered if the risk can be contained within a “Failed Entity”. If the failure of one Bank can bring down other stable businesses, it would mean bad risk management. In this respect, failure of “Indian Post Bank” has the potential of developing into a major scam that can spread the risk to the consolidated fund of India.
In my opinion it is not logical for RBI to create this new risk.
Further, going by the legal structure in India, it is possible that the prospect of “Indian Post” turning into a “Commercial Venture” either directly or indirectly may be in conflict with the constitutional framework. Hence the Banking license to Indian Post could be challenged.
I would like Dr Subramanya Swamy to provide his views on this aspect.
While therefore giving my firm view that Indian Postal Department should withdraw its application (rather than RBI rejecting the same), I would like to express that the Indian Postal Department can contribute to the “Financial Inclusion” objective without setting up a Bank.
For example, as is already happening, Postal department can continue to be the “Disbursal Agent” for any Government subsidy. By simply linking the E Money order scheme to the disbursement chain, the objectives can be achieved without any additional investment from the side of the postal department.
Postal department can also modernize its IT infrastructure so that the efficiency of operation can be improved. Even today, the Speed Post is actually more efficient than private courier service though many in the public donot realize it. May be we need to introduce 24X7 speed post counters and more customer friendly operators to manage the counters. The back end can be stream lined and just as Premium couriers charge upto Rs 400 for guaranteed next day delivery, Postal authorities may also introduce “Guaranteed Speedpost Delivery” as a premium service.
The postal letter system can also be revolutionized with E-Letters being delivered electronically from one end to another end so that while Telegrams might have gone extinct, all letters would be delivered at the speed faster than the telegrams. The system would require a vending machine where the letter posted would be scanned and delivered to the destination post office where a print out would be delivered to the addressee. This will eliminate the movement of the cards in physical form. This system is similar to the Truncated Cheques or E Cheques conceptualized under the NI Act.
Postal authorities can also develop the “Postal ID” into a biometric based personal ID which can automatically be a “Postal Aadhar”. Then there could be bio-metric-cum face recognition based Assisted Money Vending systems in its rural Post offices which can be used as universal money disbursal systems for various government disbursements and also support other Banks which donot have such a network.
Additionally, Postal authority can and should develop a national e-mail exchange backbone with a secured server farm equivalent to the infrastructure of gmail so that all emails from within the country can be handled through this “Indian postal email”. Creating a commercially viable gmail alternative would be a great service that Indian Postal authorities could do to the people of India instead of rushing to become a Bank for which they are ill equipped.
It is regrettable that E &Y has failed to provide the correct guidance to the department for maximizing its service potential by upgrading and extending its present services rather than setting out to be a Banking institution which eventually may turn out to be a bad decision.
Many of the arguments presented above will with some modification apply in principle to the application of LIC Housing Finance also. Hence I donot consider it desirable that neither Indian Post nor LIC Home Finance should be considered for license.
Continuing from our previous discussion we are now left with 6 applicants only who need to be short listed for the license.