The
postal department is among 26 applicants that sought banking licences
from the Reserve Bank of India (RBI) on 1 July, part of the government’s
initiative to expand the Rs.77
trillion banking industry and widen access to financial services among
the 40% of the population that are yet not included in the system.
“Since
the proposal has financial consequences, we have told India Post to
first approach the expenditure finance committee with their proposal
before going for an inter-ministerial consultation on the matter,” said a
finance ministry official who didn’t want to be named.
A
second finance ministry official confirmed this. He said the
expenditure finance committee was yet to receive the note from the
postal department. He said, however, that the committee was likely to
clear the proposal once it’s received.
“We
cannot pre-empt how much money EFC will approve, however I am sure the
proposal makes sense because they have such a vast network which they
should utilize. The only thing is they have to develop the standards to
meet the RBI guidelines,” he added.
Approval
of the expenditure finance committee, headed by the expenditure
secretary, is required for proposals involving spending of more than Rs.300 crore and the setting up of new autonomous organizations, regardless of the amount.
The
postal department, faced with the dwindling of its main business as
more people switch to electronic means of communication and courier
companies, wants to leverage its extensive reach across India by
entering the banking business. It’s currently involved in the financial
industry to the extent that it runs post-office savings schemes, besides
collecting deposits for tax-free savings programmes.
In
its guidelines for new banking licences announced on 22 February, RBI
required applicants to prove their eligibility on several fronts—from
promoter holding to past experience to business plans. The minimum
capital required by applicants for licences is Rs.500 crore, and foreign shareholding in the new banks is capped at 49% for the first five years.
The
new banks have to be set up under a non-operative financial holding
company (NOFHC), RBI said. They also have to maintain a minimum capital
adequacy ratio—the ratio of capital to risk-weighted assets, a measure
of financial strength—of 13% for the first three years. New banks also
need to list their shares within three years of starting operations.
The finance ministry has been reluctant to allow India Post to enter the commercial banking business.
In
order to apply for a licence, the department of posts will have to
create a legal entity to segregate its banking and postal businesses,
said a second finance ministry official.
“It
will have to be a government-owned company or a bank under a statute
since a government department cannot become a bank,” said the official,
who didn’t want to be identified.
“Added
to that, the postal department has no experience when it comes to
giving credit. They have only been taking deposits till now. Sanctioning
and disbursing credit needs an entirely different aptitude,” the
official said. “We had conveyed our views to EY, when they had approached us on this issue,” he added. EY (formerly Ernst & Young) is consultant to India Post’s bid for a banking licence.
A
third finance ministry official said it will be difficult for India
Post to get a banking licence from RBI since the guidelines call for a
non-operative financial holding company.
Besides
that, although India Post boasts of a strong 150,000 branch network, a
majority of these may not get converted into bank branches in the event
it gets a licence, this official added.
“Expertise
in (handling) National Savings Certificates will not be enough for
giving credit,” he added, making the point that the department has no
specialized experience in the business.
India
Post had 154,822 branches across the country as of 31 March, the latest
data available, the largest for any postal department in the world, and
close to 90% of them—139,086—are in rural India. This is more than four
times the number of rural branches run by India’s banks.
RBI
has clarified that the conditions it has set are merely the necessary
ones and that all applicants meeting them won’t be given a licence. The
central bank will screen the applications, refer them to an advisory
committee and take a final call on licences based on its
recommendations.
If the focus is financial inclusion, the focus should be on looking for solutions rather than raising barriers, said Ashvin Parekh, national leader, global financial services at EY.
“Nobody
is saying to convert the existing Post Office Savings Bank (POSB) into a
commercial bank. Post Bank of India has to be a subsidiary which needs
to be registered as a company and the government equity in this new
entity could be diluted,” he said. Through the POSB, India Post collects
deposits starting as low as Rs.20 with an annual interest rate of 4%.
Naina Lal Kidwai, country head of HSBC India and
president of the Federation of Indian Chambers of Commerce and Industry
lobby group, said in an interview that though she is opposed to
creating any more public sector banks, she supports the idea of the Post
Bank of India.
“The
postal authority is a very interesting one because of its ability to
deliver cash where banks have never been able to reach. To create a post
bank, which many countries have done, is quite interesting. So for
those exceptions, we could and should look at giving (it a) banking
licence,” she added.
However,
Kidwai wants the government to reduce its share in the banking system
from 70% now to 30-50%, besides which she’d like to see consolidation of
the sector.
“We
have to fund such banks through taxpayers’ money. These banks can
rarely raise money from the capital market. Some of those can actually
be merged so that we create fewer banks. So we should see a
restructuring of our entire banking sector,” she added.
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