India Post’s banking dream suffers a setback

Chidambaram didn’t earmark any funds for the postal department in the interim budget, nor did it mention the proposal

Mumbai: The long-cherished dream of the Indian postal department to float a commercial bank, has hit a major hurdle, after the government stopped short of providing the necessary capital needed for the department to enter India’s Rs.83 trillion banking industry.

The interim budget announced by finance minister P. Chidambaram on Monday didn’t earmark any funds for the postal department, nor did it mention the proposal in the budget, even as the Reserve Bank of India (RBI) approaches the final stages of granting licences to a third set of private banks in Asia’s third-largest economy.

India Post is one among the 25 applicants in the race for a banking licence. Major business houses in the race include Reliance Capital Ltd, Bajaj Finserv Ltd, Aditya Birla Financial Services Group and L&T Finance Holdings Ltd.

An expert committee under former Reserve Bank of India (RBI) governor Bimal Jalan is currently scrutinizing the applications and is expected to make the final recommendations to the central bank by March. RBI will then issue licences based on the recommendations.

This is a clear signal that the Congress party-led United Progressive Alliance (UPA) government is not keen to allow the postal department to become a commercial bank, said a bureaucrat at the government. He requested anonymity citing sensitivity of the matter.

“Since the interim budget is silent on this proposal, it is very unlikely that the cabinet will give its nod and provide capital in the next three to four months, by when the government’s term comes to an end,” said the official.

General elections in the country are due by May.

While the interim budget is silent on postal department’s banking plan, it has earmarked over Rs.4,000 crore for the department to expand its technology platform. But this is unrelated to the banking plan, the official said.

Recently, RBI’s external committee scrutinizing bank licence applications had sought the necessary cabinet approval from the postal department to go ahead with the banking plan. This is because the department is a division of the government and, technically, government will be the promoter of the proposed Post Bank of India.

But the cabinet is yet to approve the plan.

The postal department estimated a capital requirement of Rs.1,900 crore for its entry into the banking sector and for a roll-out of business in the subsequent years.

As per RBI’s guidelines, new banks need a minimum capital of Rs.500 crore initially, and a business road map to promote financial inclusion.

According to the official cited earlier, RBI is convinced about India Post’s track record and has sought no additional details or documentation, other than the cabinet approval.

Cabinet approval and capital preparedness are, thus, critical factors for the department to secure a nod for a banking licence. In the absence of this, the postal department may have to forego its plans for a banking licence, at least in this round.

Difference of views

The finance ministry has been opposing India Post’s banking plan, arguing that the postal department doesn’t have the expertise needed to become a bank, such as experience in handling credit.

Besides, the Planning commission, too, had informally expressed its reservations on India Post’s banking entry, citing broadly the same reasons.

But, India Post argues that it can significantly boost financial inclusion through its nationwide network of 155,000 post offices.

Unlike in previous instances, when RBI licenced new banks to introduce competition in the banking sector, this time around the primary objective of the central bank is to promote financial inclusion.

Currently, 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.

Postal department’s aspiration to float a bank is two decades old, but 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.

“More than the absence of mention (of India Post’s banking plan) in the interim-budget, what is a bigger process (necessary for them) is to get the cabinet approval for the proposed post bank,” said Abizer Diwanji, partner and head of financial services, EY India.

“The postal department has vast experience in deposit taking and has the trust of the people. Its entry into banking will certainly help to push financial inclusion in the country,” Diwanji said.