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Is RBI's payments bank move aimed at stifling India Post's banking bid?

Gyanendra Keshri, Executive Editor, INCLUSION

India's banking network can more than double just by bringing postal network on board

In its guidelines for licensing of payments banks, the Reserve Bank of India (RBI) said the move is intended to “further financial inclusion”, which is among the top priorities of Narendra Modi government. The government has set a target to open 100 million new accounts under Pradhan Mantri Jan Dhan Yojana by 26th January 2015. The scheme was launched on 28th August 2014.

No doubt, the existing banking infrastructure is insufficient to provide services to the country of over 1.25 billion population. As on 31st March 2014, total number of bank branches in India stood at 1,15,082. So the expansion of infrastructure is badly needed. Unless the infrastructure is expanded, the financial inclusion initiatives like Jan Dhan won’t succeed.

Now the question is, will payments banks succeed in bridging the infrastructure gap in India’s financial sector? The answer, in my view, is big NO. First let’s examine the viability of payments banks. The payments banks can take deposits but can’t lend. As per the RBI guidelines, the payments banks can open small savings account and accept deposits of up to Rs 1 lakh per individual customer. These banks are also allowed to issue ATM/debit cards, but are not allowed to issue credit cards or lend in any form.

Primary source of income of commercial banks are interest spread – the difference between average rate paid to depositors and average rate obtained from borrowers. The payments banks are denied of this source of income. Moreover these banks would be required to pay higher interest on deposits to attract customers.

Payments banks will be required to invest minimum 75 per cent of its "demand deposit balances" in Statutory Liquidity Ratio (SLR) eligible government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management, as per the RBI guidelines.

Probably the main source of profit for payments banks would be charge for payments and transfers. But, why would customers go to payments banks for such services when the established commercial banks are offering it at much lower cost? So there is a serious viability issue as far as the business model of payments banks is concerned.

Moreover, lending is the most important part of financial inclusion. Payments banks can’t lend money. So, what kind of financial inclusion we can expect from payments banks when it can’t address the most pressing need. The real challenge is to provide access to small credit to poor people, who often get exploited in the hands of moneylenders. Providing deposit service is not the solution.

Therefore, the idea of financial inclusion through payments banks is certainly misplaced. It can only divert attention, but won’t address the real problem.

If the RBI and the government are serious on financial inclusion, it should immediately allow India Post to perform banking services. There is readymade infrastructure. India’s banking network can more than double just by bringing postal network on board. The number of post offices in India is over 1.55 lakh, which is substantially higher than the total number of bank branches. As on 31st March 2014 the total number of bank branches in India stood at 1,15,082. Out of these 43,962 branches or 38.2 per cent of the total was in the rural areas. Compare it with the post offices. Out of 1.55 lakh, 1,39,144 or 89.76 per cent of the total post offices are in rural areas, as per 2011 census.  

Thus, India Post would not only bridge the infrastructure gap in banking sector, but also address the main challenge of ensuring the services in rural area, that remain largely unbanked and the commercial banks show little interest in reaching out to these areas.

India Post already provides the basic services of the proposed payments banks. It accepts deposits, pays out cash and offers the services like e-payments, forex and remittance. Through various savings schemes, it handles deposits to the tune of Rs 6,00,000 crore.

India Post was among the 25 contenders for a full service banking licence last year. However, it could not get the licence, reportedly because then telecom minister Kapil Sibal was not keen on it and refused to provide the department with the minimum capital required for setting up commercial banks under the RBI guidelines. Only two firms – IDFC and Bandhan Financial – have been granted the licence. In fact, between 2003 and 2013, no new licence was issued. The RBI granted “in-principle” approval to IDFC and Bandhan in April 2014.

If the government is serious on financial inclusion it must extend full support to India Post in its endeavour to run full-fledged commercial banking service. It can be done with or without the RBI’s approval. There is so much at stake. India Post should be allowed to run full service banking through an act of parliament.

(Gyanendra Keshri can be reached at gyanendra@skoch.in)

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