NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, September 15, 2015

The Reserve Bank of India (RBI) recently gave a licence to India Post to function as a payments bank. Does it change anything for the people? Post offices in India have already been working as payments banks. Individuals open accounts, deposit and withdraw money by cash or cheques and receive payments through them. All these transactions are meticulously recorded manually in their passbook. Post offices do not provide any loans or carry out any credit transaction. This has been in operation for more than a century and much before the RBI came into existence. So, what would change after the RBI’s licence?

The Department of Post (DoP) had earlier applied to RBI for a banking licence for its fully-owned subsidiary, India Post. The DoP’s assets and liability position, as revealed by its balance sheet, was far from satisfactory for RBI’s comfort to allow the grant of a banking licence to the parent organization. Its annual deficit kept increasing from Rs.5,339 crore in 2013-14 to Rs.6,378 crore in 2014-15 to Rs.6,665 crore in the budget of 2015-16. As a result, the banking licence had to be granted to a separate entity, India Post, with distinct assets and liabilities of its own. The RBI’s licence for payments bank to India Post should, therefore, separate the banking business from various other services provided by DoP, which may or may not run on a commercial basis. A commercial focus on the banking business is desirable for viability and efficiency.

However, with RBI’s licence comes the condition that India Post cannot accept deposits of more than Rs.1 lakh per account. Earlier, DoP had a self-imposed constraint of not allowing group or institutional accounts, official capacity accounts, or security deposit accounts. The payments bank licence has formalized this constraint. If DoP decides to transfer its entire banking business to India Post, it may face issues in cases where accounts have deposits in excess of Rs.1 lakh. There are several such accounts. As a result, there will be a parallel business being conducted by DoP for large accounts and by India Post for other accounts, creating inefficiency and confusion. Therefore, restricting deposits to Rs.1 lakh per account will hamper the efficiency and viability of the business.

Concerns expressed by public sector banks (PSBs) about increasing competition for their low-cost current and savings deposits on account of payments banks are entirely misplaced because DoP was already in this business before, nor would other payments banks make things worse for PSBs. Payments banks cannot pay high interest on their deposits because they have to maintain 75% of their deposits in government securities, where the interest would be about 7-8%. Since their cash requirements would be higher—given the nature of their accounts—the remaining 25% cannot fetch higher returns. On the contrary, RBI’s insistence on charging ATM withdrawals and imposing absolute limits on deposits per account may discourage people from doing business with payments banks. The insistence on charging an ATM fee may even be socially undesirable because ATM withdrawals from payments bank accounts would be typically for petty sums. Any charge to recover the cost of operating ATMs would be highly regressive.

If the payments bank of India Post enters into a business relationship with any established commercial bank, RBI’s approval will be required. There is no gain for either DoP or India Post when commercial banks directly use the services of post offices as business correspondents. The current measure of granting payments bank status only to India Post is not likely to make any difference to any stakeholder.