August 13
New Delhi: The
expenditure department of the finance ministry has sent back India Post’s draft
cabinet note seeking Rs.1,900 crore to set up a commercial bank to another wing
of the ministry and asked it to first seek the approval of the expenditure finance
committee (EFC). The entity is proposed to be named Post Bank of India
The postal
department is among 26 applicants that sought banking licences from the Reserve
Bank of India (RBI) on 1 July, part of the government’s initiative to expand
the Rs.77 trillion banking industry and widen access to financial services
among the 40% of the population that are yet not included in the system.
“Since the
proposal has financial consequences, we have told India Post to first approach
the expenditure finance committee with their proposal before going for an
inter-ministerial consultation on the matter,” said a finance ministry official
who didn’t want to be named.
A second
finance ministry official confirmed this. He said the expenditure finance
committee was yet to receive the note from the postal department. He said,
however, that the committee was likely to clear the proposal once it’s
received.
“We cannot
pre-empt how much money EFC will approve, however I am sure the proposal makes
sense because they have such a vast network which they should utilize. The only
thing is they have to develop the standards to meet the RBI guidelines,” he
added.
Approval of the
expenditure finance committee, headed by the expenditure secretary, is required
for proposals involving spending of more than Rs.300 crore and the setting up
of new autonomous organizations, regardless of the amount.
The postal
department, faced with the dwindling of its main business as more people switch
to electronic means of communication and courier companies, wants to leverage
its extensive reach across India
In its
guidelines for new banking licences announced on 22 February, RBI required
applicants to prove their eligibility on several fronts—from promoter holding
to past experience to business plans. The minimum capital required by
applicants for licences is Rs.500 crore, and foreign shareholding in the new
banks is capped at 49% for the first five years.
The new banks
have to be set up under a non-operative financial holding company (NOFHC), RBI
said. They also have to maintain a minimum capital adequacy ratio—the ratio of
capital to risk-weighted assets, a measure of financial strength—of 13% for the
first three years. New banks also need to list their shares within three years
of starting operations.
The finance
ministry has been reluctant to allow India Post to enter the commercial banking
business.
In order to
apply for a licence, the department of posts will have to create a legal entity
to segregate its banking and postal businesses, said a second finance ministry
official.
“It will have
to be a government-owned company or a bank under a statute since a government
department cannot become a bank,” said the official, who didn’t want to be
identified.
“Added to that,
the postal department has no experience when it comes to giving credit. They
have only been taking deposits till now. Sanctioning and disbursing credit
needs an entirely different aptitude,” the official said. “We had conveyed our
views to EY, when they had approached us on this issue,” he added. EY (formerly
Ernst & Young) is consultant to India Post’s bid for a banking licence.
A third finance
ministry official said it will be difficult for India Post to get a banking
licence from RBI since the guidelines call for a non-operative financial
holding company.
Besides that,
although India Post boasts of a strong 150,000 branch network, a majority of
these may not get converted into bank branches in the event it gets a licence,
this official added.
“Expertise in
(handling) National Savings Certificates will not be enough for giving credit,”
he added, making the point that the department has no specialized experience in
the business.
India Post had
154,822 branches across the country as of 31 March, the latest data available,
the largest for any postal department in the world, and close to 90% of
them—139,086—are in rural India India
RBI has
clarified that the conditions it has set are merely the necessary ones and that
all applicants meeting them won’t be given a licence. The central bank will
screen the applications, refer them to an advisory committee and take a final
call on licences based on its recommendations.
If the focus is
financial inclusion, the focus should be on looking for solutions rather than
raising barriers, said Ashvin Parekh, national leader, global financial
services at EY.
“Nobody is
saying to convert the existing Post Office Savings Bank (POSB) into a
commercial bank. Post Bank of India
Naina Lal
Kidwai, country head of HSBC India and president of the Federation of Indian
Chambers of Commerce and Industry lobby group, said in an interview that though
she is opposed to creating any more public sector banks, she supports the idea
of the Post Bank of India
“The postal authority
is a very interesting one because of its ability to deliver cash where banks
have never been able to reach. To create a post bank, which many countries have
done, is quite interesting. So for those exceptions, we could and should look
at giving (it a) banking licence,” she added.
However, Kidwai
wants the government to reduce its share in the banking system from 70% now to
30-50%, besides which she’d like to see consolidation of the sector.
“We have to
fund such banks through taxpayers’ money. These banks can rarely raise money
from the capital market. Some of those can actually be merged so that we create
fewer banks. So we should see a restructuring of our entire banking sector,”
she added.
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