India Post might not find it easy to make its hoped-for banking foray if the Union finance ministry has its way.
The department of financial services in the ministry fears the proposed postal bank might turn out to be yet another government bank, competing with other public sector lenders.
Another hurdle is the ministry’s department of expenditure, yet to approve the Rs 600 crore (Rs 6 billion) of funds needed for setting up the bank.
India Post sources said there was a 'strong lobby' working against it, complaining it has been denied a bank licence despite having a bigger network of branches than either IDFC or Bandhan, the two entities that have got an in-principle nod for one from the Reserve Bank of India.
India Post needs about Rs 1,800 crore (Rs 18 billion) as initial capital investment in the proposed bank. It has asked the ministry to provide for Rs 623 crore (Rs 6.23 billion); the rest it says it will raise from the market.
Of this, Rs 500 crore (Rs 5 billion) is needed as initial paid-up capital.
The department of posts has been trying to get approval from the Public Investment Board under the expenditure department for this but due to the general elections, the matter will be considered by the next government.
DFS has already made its stand clear.
It says it would not be wise to have another clone of public sector banks at a time when the thinking is that the existing 25 state-owned lenders should be consolidated to achieve economies of scale.
Concerns have also been raised on various logistics like the lack of skilled personnel and little experience in handling universal banking operations.
“RBI had sought DFS’ views on the importance of a postal bank in financial inclusion and the department had said there are already too many PSBs in the space and bringing another one would not make sense,” said a finance ministry official who did not wish to be identified.
On whether India Post was “fit and proper” to run a bank, he said the call would ultimately be taken by RBI.
The expenditure department was separately looking into the capital requirements but there are some issues there, the official added.
The high-level advisory committee set up by the RBI to look into the bank licence applications had recommended the central bank consider India Post’s application separately, in consultation with the government. RBI had agreed to do so.
A senior DoP official said the department knew the finance ministry was not in favour of its application, while RBI was willing to consider it.
“RBI knows that unless we have the government's backing, their giving us a licence doesn't mean anything, as part of the government, we do not have the ability to shell out Rs 500 -crore (Rs 5-billion) capital on our own to start a bank,” he said.
On condition of anonymity, he said it was a “wait and watch” game for the department.
“We are hoping that when the new government comes, they will have a different view on it.”
The official said RBI had not contacted the department formally about any of the concerns raised.
The issues highlighted during a meeting two months earlier included the fact that DoP did not have the experience to handle credit and India Post was a loss making entity.
“But, we think we are very well prepared,” the official said. Which organisation has had such a long record of handling money, with almost 290 million accounts, the person asked.
“IDFC doesn’t have that experience. Neither does Bandhan, the microfinance institution which has got the licence,” he said.
India has the largest postal network in the world, with 155,015 post offices, of which 139,144 (89.8 per cent) are in rural areas.
DoP posted a loss of Rs 5,805 crore in 2011-12. Bandhan has 2,016 branches, a little more than half of which are in eastern and northeastern parts. It earned a profit of Rs 200 crore (Rs 2 billion) in 2012-13. IDFC earned a profit of Rs 1,836 crore in 2012-13.
The official said there was a very strong lobby working against the department; they knew a postal bank would give tough competition to the existing banks.
“So, it’s all a bogey. If you give it on merit, we are the number one.”
The official added the department was best placed to meet the agenda of financial inclusion, as existing banks had always considered it a “burden”.
Recently, minister for communications Kapil Sibal had said they were trying hard to persuade the finance ministry to get Rs 623 crore (Rs 6.23 billion) cleared.
Only after the latter approves will it be put before the Cabinet Committee on Economic Affairs.
“Whether India Post is to be considered needs to be deliberated upon and if so, the circumstances and conditions involved and what more is required to enable it to discharge this function,” Financial Services Secretary G S Sandhu had told Business Standard in an interview recently.
His predecessor, Rajiv Takru, had indicated there were several challenges for India Post to set up a bank.
“A bank is not set up in a hurry. As far as we are concerned, India Post has been the brainchild of the postal department but we have been doing banking for years.
"We have some idea on how difficult it is to set up a bank. It’s not a passing fancy.
"A bank needs to have several functions in place such as risk management, credit and treasury,” he had said.
YET TO BE FRANKED
- RBI says it will also consider an application from India Post. It will, however, be under a separate process, to be carried out in consultation with the government
- Public Investment Board under the expenditure department of the finance ministry yet to approve Rs 600 crore (Rs 6 billion) for the postal bank
- Department of financial services against entry of another state lender
- India Post feels it is better placed than IDFC and Bandhan for a bank licence
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