Don’t Bank On That Idea

Late in the evening of July 1, a press release from the Reserve Bank of India created quite a to-do. In a rare display of transparency, the central bank disclosed the names of all 26 applicants who had queued up for a bank licence. While most of the names were expected, one unusual applicant stood out—the department of posts. Predictably, most newspaper columnists and commentators have commended this move. The acclaim and approval for the postal department’s future bank springs primarily from its one (and probably only) redeeming physical attribute—its enormous reach. According to India Post’s annual report for 2012-13, India has over 1.54 lakh post offices, of which close to 90 per cent are in rural areas. That makes it the world’s largest postal network.

This is a gigantic achievement. What’s more, given RBI’s unambiguous stipulation that new licences will be granted on the basis of the applicant’s plans for financial inclusion, a new bank for the postal department seems like a nap bet. Its rural network presents the best financial-inclusion platform among all applicants.

But in realistic terms, it is unlikely that the Reserve Bank of India will grant a licence on the strength of the network alone. There are other drag factors. For one, questions can be raised about staffing. As on March 31, 2012, the postal department had 4,74,574 people on its rolls. Second, the central bank could allocate negative marks for the department’s financial health. The 2012-13 annual report put the department’s 2011-12 losses at Rs 5,806 crore. In 2010-11, it was Rs 6,345 crore. Ironically, operational expenses (Rs 8,720 crore) overshadowed the revenue receipts of Rs 7,899 crore. Sure, the government fills the gap every year, but that might not stop the Reserve Bank of India from asking questions about who’ll stump up capital for the bank year after year.

Third, most of the department’s products and services are priced way below cost. And, given the political sensitivities, it is unlikely prices can be raised. This can be a source of continuing anxiety for the central bank. There are many other reasons for RBI to look askance—state of technology, operational processes, skill sets. One justification trotted out is the assumed success of the postal savings and insurance schemes. The department is the custodian of a humongous Rs 6,05,697 crore in people’s savings. But the net annual loss  might induce the Reserve Bank of India to raise reasonable doubts about the security and efficient handling of savings.

The central question is: does India Post need to reinvent itself? The answer is: certainly. What shape could that take? The rural network, for instance, could turn itself into the country’s largest banking correspondent network. Second, it has the best database on Indians and could leverage that to provide authentication of KYC services. The postal department is one of India’s best institutions and it can definitely reinvent itself in a million different, and sustainable, ways. But a bank?

(The author, a policy analyst, is a fomer executive editor of The Economic Times); E-mail your columnist: rajrishi.singhal AT gmail.com