India Post waits for a new avatar: Post Bank of India

With over six trillion in balance, it even beats State Bank of India

By R. Chandrasekaran

CHENNAI: There are scores of companies that have applied for a banking license with the Reserve Bank of India. Big names include the Tatas, the Birlas, L&T, Reliance, Mahindra & Mahindra and JM Financial to name a few. India Post have also joined the race to apply for a banking license.

There are several factors that go both for and against the India Post’s quest to get banking license. Its network is undoubtedly wide with close to 155,000 post offices throughout the country. Its outstanding balance at the end of March 2012 under the various post office saving schemes was around Rs. 6.05 trillion. On the other hand, India’s biggest bank, State Bank of India, generated approximately half of that amount.

The post offices have also been used to collect deposits and engaged in offering tax-savings instruments apart from accepting public provident fund. These apart, the government is also using post office accounts to make payments to the beneficiaries of the rural jobs scheme and transfer of subsidies directly. Therefore, their quest to launch a bank called Post Bank of India is quite understandable.

The post office may also fulfill the RBI’s plan of taking banks to more rural areas as it has more than 139,000 post offices there with about 6,000 people, on an average, are covered based on 2011 postal department’s estimate. In urban areas, the coverage is about 24,000 people per post office.

The postal department has been incurring losses and the fiscal year 2012 indicates a loss of Rs.63.46 billion. The officials believe that opening up banks will allow them to make up the losses suffered over the years as private couriers are eating away the postal department’s revenues.

However, their ambitious plan seems to be having roadblocks. The finance ministry is not in a mood to give the postal department green signal and is reportedly opposing the move citing lack of expertise in the field of handling credit and related risk management.

While it is true that the post offices collect huge money, they are not involved in any credit management so far. The postal department, however, contends that they will not convert all the post offices overnight and will start 300 – 400 branches in the first phase. Interestingly, Ernst & Young, who was hired to advise the postal department on its plan to launch banking operations, is preparing a final report to the postal department. It viewed that the finance ministry’s concern of credit experience can be addressed by building up gradually.

Meanwhile, former finance secretary D.K. Mital, reportedly said, “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. Mere experience in collecting deposits under the post office scheme is not enough. The department should ideally focus on improving their core activity.”

While a section of former and current officials believe that postal department should focus on its current business and adopt new technology to be more profitable rather than venturing into other areas of operations, another section of officials are not ruling out the possibility of lobbying by big banks against the proposal since it could be a big threat to their business because of the nationwide coverage of Indian Post.

Nonetheless, the department is unmoved by the maneuvers or overtures or heartburns and gearing itself to stake its claim to start banking operations. For its part, the RBI will form a committee to scrutinize the applications from various sections later this year and decide on their recommendations. However, it made it quite clear that it is not imperative for them to issue a banking license irrespective of the qualification. Therefore, the central bank holds key to the postal department’s ambitious entry to the banking sector.

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