Insights into Editorial: Can only love for our postman ensure success for India Post Payments Bank?
In the wake of the demonetization drive, India’s financial sector is witnessing turbulence and the payments space is waiting to be grabbed with new ideas and innovations to give a big push to a cashless economy. In this regard, India Post Payments bank (IPPB), which was to be made operational by March 2017, will be launched in January.
The Department of Post (DoP) had earlier applied to RBI for a banking licence for its fully-owned subsidiary, India Post. The DoP’s assets and liability position, as revealed by its balance sheet, was far from satisfactory for RBI’s comfort to allow the grant of a banking licence to the parent organization. Its annual deficit kept increasing from Rs.5,339 crore in 2013-14 to Rs.6,378 crore in 2014-15 to Rs.6,665 crore in the budget of 2015-16.
Therefore, the idea of payment bank was mooted. IPPB got an in-principle approval on 7 September 2015. It is the largest among the eight that are likely to start operations over the next few months. Eleven entities received the Reserve Bank of India’s (RBI’s) in-principle approval for floating payments banks but three of them have left the field.
IPPB is entirely owned by the government of India and will be run independently by a professional management even as DoP plays the role of a mentor. IPPB will start with a Rs400 crore equity capital and a Rs400 crore grant from the government to set up a technology network in rural India.
Operational guidelines for Payment banks:
Capital requirement: The minimum paid-up equity capital for payments banks is Rs. 100 crore.
Leverage ratio: The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
SLR: Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% 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% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
What are the scopes of activities of Payment Banks?
- Payments banks will mainly deal in remittance services and accept deposits of up to Rs 1 lakh.
- They will not lend to customers and will have to deploy their funds in government papers and bank deposits.
- The promoter’s minimum initial contribution to equity capital will have to be at least 40% for the first five years.
- They can issue ATM/debit cards but not credit cards.
- They can carry out payments and remittance services through various channels.
- Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. is allowed.
Benefits of IPPB:
- India post has a network of 154,939 post offices, the largest such network in the world. As of 31 March 2015, 90% of the post offices were located in rural India—on an average 8,354 people are served by one post office, which covers 21.22 sq km.
- IPPB has tremendous possibilities as it can bring millions of individuals and small businesses into the formal banking channel by offering savings accounts of up to Rs100,000 and current accounts with a special focus on micro, small and medium enterprises, small merchants, village panchayats, self-help groups, etc.
- It can also be the vehicle for the direct benefits transfer of social security payments of various ministries and pay utility bills, beside taking care of payments of various central and state governments and municipalities as well as colleges, universities and other educational institutions.
- It can also play a major role in remittances—both domestic and cross-border—with a special focus on migrant labourers, low-income households and, finally, distribute third-party financial products such as insurance, mutual funds, pension and credit products.
Challenges before IPPB:
- IPPB cannot pay high interest on their deposits because they have to maintain 75% of their deposits in government securities, where the interest would be about 7-8%. Since their cash requirements would be higher—given the nature of their accounts—the remaining 25% cannot fetch higher returns.
- India Post has not been profitable for several years in a row, and in 2013-2014 lost USD 825 million USD. However, India Post developed an ambitious plan in November 2012 to equip all its post offices with computer hardware, solar charging devices and network connectivity. To embrace these new technologies, almost 740 million USD was invested, however, much remains to be done. Ensuring that this IT modernization project is successfully completed and reduce costs will be a major challenge.
- Also, challenging will be to train the staff in the 130’000 rural post offices to ensure they can adequately use this equipment and offer high quality financial services.
How to make IPPB more competitive?
- DoP has a network of 140,000 post offices in rural areas. On an average, a post office serves 8,100 persons six days a week. Such an extensive and intensive network gives it a unique advantage in reaching the last mile to deliver any financial service. Therefore, IPPB should be allowed to provide limited loans to its rural clients for meeting their productive needs.
- If there were concerns about risk of default, the amount of the loan could be restricted to Rs.50,000 or Rs.1 lakh as per case. There could be an appropriate conditionality for subsequent loans to the same person.
- IPPB will also have to deepen its understanding of the unique needs of base of pyramid (BOP) consumers and develop products and customer experiences tailored to these needs. Technology is, of course, going to be key to keeping costs low. The use of Aadhaar-linked authentication, know-your-customer and e-sign and the proliferation of mobile/online payment systems hold special promise for reducing the cost of delivery.
- In short, an organization like India Post with access to the vast network of post offices should have been considered not only as a payments bank, but also as a bank with limited credit operations to address the national goal of financial inclusion.
The government’s objective of achieving 100% financial inclusion got a shot in the arm with the India Post Payments Bank. This could be the proverbial game changer with regard to financial inclusion. However, IPPB can make a new beginning only if it is run as a business entity and not a government department. The key to the success of IPPB will also be its business plan and technology. The technology will hold the key to the success of a payments bank. With its phenomenal reach across India, IPPB can do wonders—geo-mapping every inch of the country and making every kirana store, petrol pump, mandi its business correspondent, and usher in a revolution in the payments space when the government is pushing hard for a digital economy.