Finance minister P Chidambaram recently stated that Reserve Bank of India is likely to issue licences to seven new banks (read here). A total of 26 applicants had applied to be awarded banking licences. The FM’s comments have immediately sparked off a guessing game about the identity of the lucky seven.
We are loath to give up an opportunity to speculate; we will therefore definitely hypothesize about the lucky seven. But that is for a later posting. For the moment, let us focus on another important aspect. Mr Chidambaram also said that these new institutions should strive to create new banking templates and not follow the business model adopted by the existing, new-generation, private sector banks. One tends to agree with him, though the scope for innovation in the Indian financial sector does seem quite limited, what with the numerous regulatory and political obstacles erected for banking operations.
Whatever be the message, one only hopes that the FM’s imprimatur of avoiding clones doesn’t force the central bank to grant a banking licence to the postal department. The postal department is claiming that its massive network gives it access to almost all corners of the country, including large areas which go either unserved or under-served by formal banking practices. While the postal department is undoubtedly the only organisation with the largest physical presence in the country, is that a necessary and sufficient condition for granting a banking licence?
This is not to say that the postal department hasn’t done a great job. The postal department has played a stellar role in stitching disparate parts of the country into a cohesive whole, managed to reach the earnings of migrant workers from one corner of the country to their families in another corner, tended to the fires of communications across languages and regions, and much much more.
But does all this still qualify for a banking licence? I don’t think so. I had earlier written about it in a guest column for magazine Outlook (read here).
Political pressure forces the postal department to sell most of their products below cost of production, thereby painting the bottom-line luxuriantly red and requiring infusion of fresh funds from the government every year. This is the main reason why the postal department should not be given a banking licence. The postal deficit for the past two years and this year’s budgeted deficit are given below (in rupees crore):
2011-12 2012-13 2013-14 (Budgeted)
5716 5838 6717
The government, as things stand, needs to infuse large doses of capital into public sector banks every year (Rs 16,000 crore has been earmarked for government owned banks and financial institutions during 2013-14). Therefore, adding another colossal institution which is likely to absorb large amounts of cash every year is diverting additional amounts of the government’s limited resources, which could be better used for development purposes.
Postal departments in many other countries launched banking services at various times in the past — such as, Deutsche Postbank in Germany (which is now owned to the extent of 94% by Deutsche Bank), Japan Post, Postbank N.V. in The Netherlands which has since been acquired by ING Bank, POSBank in Singapore which has been bought over by DBS Bank. The lesson from the above examples is clear — all the postal banks had to be acquired by private banks. The two exceptions might be China — The Postal Savings Bank of China — and Brazil’s postal services, which had to tie-up with a private bank (Bank of Brazil) to gain access to financial products and services.
With such a wealth of experience available globally, a rethink might be necessary before allowing India Post to diversify into banking services. An alternative strategy would be leverage the same network to allow marketing of third party products.