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Finance ministry opposes India Post’s banking licence plan

The finance ministry has opposed India Post’s plan to seek a commercial banking licence from the Reserve Bank of India (RBI) on grounds that the postal service doesn’t have the expertise needed in relevant areas, such as handling credit.

India Post is keen to set up a commercial bank called the Post Bank of India, arguing that it can significantly boost financial inclusion in Asia’s third largest economy through its nationwide network of 155,000 post offices.

This will also allow the organization, which posted a loss of Rs.6,346 crore in fiscal 2012, to make up for business dropping off over the years as letter writing dwindled and private courier firms took away market share.

Losses have significantly increased in recent years on account of higher expenses.
However, the finance ministry’s department of financial services doubts India Post’s ability to set up and run a bank, according to a senior postal department official who didn’t want to be named.
Some of the country’s large public sector banks have also been lobbying against the proposal, concerned that India Post, with its vast branch network, could pose a threat to their business, said the official, who’s directly involved with the proposal.

“The larger idea of setting up a bank is to further the cause of financial inclusion. Entry of India Post into banking can significantly help address this situation,” the official said.
However, “They (finance ministry officials) are asking too many questions. Why (do) you need a bank? What is your expertise to run a bank?” the official said.

India Post is engaged in several related functions, such as running a savings bank scheme, selling tax-saving instruments and accepting public provident fund deposits. The government also uses post office accounts to route payments to beneficiaries as part of the rural jobs programme and the direct transfer of subsidies.
A former government official said the postal department should focus on its existing business.

“It is totally illogical for the postal department to enter into banking. They do not have the experience in handling credit or the ability to manage a bank,” said D.K. Mittal, who was finance secretary till recently.
“Mere experience in collecting deposits under the post office scheme is not enough. The department should ideally focus on improving their core activity.”

and try to become profitable instead of diversifying operations.According to Mittal, the department should adopt new technology
Emails to financial services secretary Rajiv Takru last week remained unanswered.
RBI invited applications from private and public sector entities in February to set up banks, three years after former finance minister Pranab Mukherjee made the suggestion and nine years after the last round of licences were issued.

The application deadline expires on 1 July. The minimum capital required by applicants is Rs.500 crore.
Companies that have expressed interest in starting banks include L&T Finance Holdings Ltd, India Infoline Ltd, Religare Enterprises Ltd, Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd, LIC Housing Finance Ltd, Bandhan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd,Tata Capital Ltd, IDFC Ltd, Reliance Capital Ltd, India Infrastructure Finance Co. Ltd, Bajaj Finserv Ltd and Srei Infrastructure Finance Ltd.

Despite the finance ministry’s reservations, India Post is determined to go ahead with its application and has appointed consultancy firm Ernst and Young (E&Y) India to advise it on the plan, officials said.
The department is still in consultation with various ministries on the modalities of setting up a new bank.
While the plan is almost two decades old, the department got serious about it sometime in 2006, conducting internal viability studies and seeking the opinion of consultancy firms.

The move gathered momentum when RBI announced final licensing norms for new banks in February.
According to an interim report submitted by E&Y India in April, the proposed Post Bank of India will focus on the bottom of the pyramid, or the poor, in non-metro centres and avoid urban areas that are already well served by large banks.

“The existing deposit holders under the post office savings bank scheme will have an option to transfer their deposits to the bank if they choose to do so,” said the postal department official cited earlier in the story.
In the initial phase, the Post Bank will have 300-400 branches and a specific number of postal outlets will be managed by each of them.
According to the official, the department of posts plans to introduce an advanced technology platform that will connect all post office branches. It has also studied models of post offices that run banks in Germany and Japan.
E&Y will soon submit its final report to the postal department, said Ashvin Parekh, partner (financial services).
“There have been some concerns raised by the finance ministry regarding the proposal,” he said. “We are in the process of submitting our final report, which will...answer all...concerns.”
Financial inclusion, or ensuring that more of the country’s citizens become part of the banking system, has been a key aim of both the central bank and the Congress-led United Progressive Alliance government for several years. About 40% of India’s population still do not have access to formal financial services.
RBI introduced a three-year financial inclusion programme in April 2010 that saw banks opening outlets in 200,000 villages. RBI has advised banks to draw up a financial inclusion plan for 2013-2016 to further broaden access.

India Post will pitch its vast branch network as an advantage in this direction, although the current state of some of these outposts isn’t likely to inspire much confidence in those looking for a safe place to keep their money.
Out of the total 154,866 post offices, 139,040 are in rural areas. About 6,000 people are covered on average by a post office in rural areas and about 24,000 in urban areas, according to a 2011 estimate by the postal department.

As of 31 March, the outstanding balance under the post office savings scheme stood at Rs.6.05 trillion, which is equivalent to half the deposits of government-owned State Bank of India, the country’s largest commercial bank, and double that of the largest private lender, ICICI Bank Ltd.
E&Y’s Parekh said: “The idea is not to convert the existing post office savings into a bank. The plan is to create a completely new bank. Hence there won’t be any large requirement of capital in the beginning,”
As for the finance ministry’s concerns about lack of credit experience, Parekh said: “This can be built up gradually.”

Source : http://www.livemint.com/Politics/lLLBYN3n5qQBxgg8bjjlRK/Finance-ministry-opposes-India-Posts-banking-licence-plan.html

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