India Post Payment Bank (IPPB)

In June 2016, the Union Cabinet has given approval to set up India Post Payment Bank (IPPB). The proposal is to make 650 branches operational by the end of September 2017. The announcement of setting up IPPB to further financial inclusion was made in 2015-16 budget and the Department of Posts managed to get ‘in-principle’ approval for setting up of IPPB from the Reserve Bank of India in September 2015. IPPB with its vast infrastructure, reach and resources is likely to further the government’s agenda of financial inclusion by offering simple, low-cost, quality financial services that are easily accessible throughout the country. Country’s 40% the population which is outside the ambit of formal banking is expected to benefit immensely from this project.

Important Facts

• The IPPB will be set up as a public limited company under Department of Posts with 100% government equity. It is slated to begin with 400 crore equity capital and Rs. 400 crore as grant from the government.
• It will be rolled out in phased manner to begin with 650 branches. Once rolling out is completed, IPPB will be largest bank in the world in terms of accessibility. It plans to put 5000 ATMs in the country.
• Apart from payment bank branches, it is also expected to provide services through digital payments, linked post offices and alternative channels operating on modern technology (mobiles, PoS/ m-PoS devices).
• It will provide basic banking, payments of direct benefit transfers, utility bills, collection of fees, collection of taxes, remittance services and financial services like insurance, mutual funds, and pensions in tie-up with third party financial providers.
• The bank will be managed under a professional set up. It will be headed by a chief executive officer and will have representations from departments like the Department of Posts, Department of Expenditure and Department of Economic Services among others. The Secretary, Department of Posts will be the Part time, Non-Executive Chairman of the Bank.
• Main focus on IPPB will be on rural, semi-urban, and un-banked segments of the society. It proposes to shift from a cash dominant to a cashless economy.

Questions for Analysis

• What is the scope of activities and significant features of Payment Banks?
• Out of the 11 players which were given in-principle license for Payment Banks, three have surrendered their license so far. What are the reasons for the same?
• What are the advantages IPPB have over other entities?
• What are suggestions and way forward for IPPB?

What is the scope of activities and significant features of Payment Banks?

Introduction of Payment Banks was mooted by RBI’s Nachiket Mor committee on ‘Comprehensive financial services for small businesses and low income households’, which submitted its report in 2014. This committee had recommended specialized banks for achieving financial inclusion and increased access to financial services to cater to the needs of low income groups and small businesses.

Scope of activities

The scope of activities of the payment banks are as follows:

• They can accept demand deposits up to a maximum of Rs one lakh per individual customer.
• They can issue ATM/debit cards but not credit cards.
• They can offer payments and remittance services.
• They can offer simple financial products like mutual fund units and insurance products etc.
• They offer small savings accounts but cannot advance loans.
• They can offer mobile payments/transfers/purchases, net banking and third party fund transfers.
• The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.

Significant features

• Payment Banks operate on small scale without any credit risk. The main objective of payment banks is to achieve financial inclusion and increase the penetration level of financial services.
• The main target groups are migrant labourers, low-income households, small businesses and other unorganised sector entities.
• It will generate new employment opportunities and will help in propagating financial literacy across the country.
• It will increase the country’s savings.

Out of the 11 players which were given in-principle license for Payment Banks, three have surrendered their license so far. What are the reasons for the same?

In 2015, RBI had given license to 11 entities {not IPPB that time} out of 41 candidates. This license was valid for 18 months; and by the end of this period, these 11 entities had to complete all requirements. As of now, three of them viz. Cholamandalam Distribution Services, Dilip Sanghvi promoted Sun Pharmaceuticals and Tech Mahindra have surrendered their license because this scheme did not work well for them. These players cited “low profit margins” for their quitting this business. There are several reasons to this. Firstly, the licensing terms clearly say that the Payment Banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services and distribute third-party financial products. However, they cannot give out loans and credit cards. The companies which applied had thought that they can make money by mobilizing deposits acting as Business Correspondents {on behalf of other banks} and by providing services in the remittance space. However, in the era of Digital Darwinism, that does not seem to be an easy task.

Secondly, some of these applicants thought that once they enter into Payment Banks business, they can follow foot-in-door policy and would later be able to get the license for full-fledged banking services. But, they are now convinced that it is not going to happen, hence better is to quit.

Thirdly, this business was inherently not for business conglomerates. The RBI is currently pushing for on-tap banking licenses for universal banks. This is more attractive for big business houses. {Under On-tap licensing policy, companies will be eligible to apply for full fledged banking license any time without waiting for the central bank to open a window. This move is a departure from the currently practiced stop-start policy according to which the RBI opens the window for bank licenses periodically but rarely.}

Fourthly,today, its very difficult to acquire new customers. Since mobile banking is now readily available, customers generally don’t need to change the banks. Technologies such as unified payments interface would further enable cheaper transactions through mobile phones.

Lastly, for urban customers, Rs. 1 lakh is a meagre amount. The conditions are such that one can deposit higher amount in a day, but at the end of the day, the books should show less than Rs. 1 Lakh. That is a great technological challenge for bigger companies – where they would show extra money? In summary, the model does not work for the organizations which do not have large presence to target the unbanked population especially in the rural areas where people are largely poor and would not deposit more than 1 lakh.

What are the advantages IPPB have over other entities?

IPPB has several advantages over other private players. Firstly, the Payment Banks model needs a huge and vast network which India Post has. It has a vast network of more than 1.5 lakh branches, 90 per cent of which are in rural areas. In comparison, all the banks in the country have about only 1.05 lakh branches on the whole.

Secondly, India Post has the experience of running domestic remittance business and accepts money from customers as part of its post office bank accounts and long-term deposit schemes such as National Savings Certificate. Thirdly, India Post already enjoys the trust of customers unlike its competitors, especially in the rural areas. Fourthly, core banking network of post offices with 22,137 core banking branches is more than that of the country’s largest lender State Bank of India (SBI) which has 1,666 core banking branches.

Sensing the potential that IPPB has in terms of offering last mile connectivity, around 50 companies including Barclays Bank, Deutsche Bank, Citibank and several state-owned banks are interested for a partnership with it and these have sent proposals to the department of posts for the same. In addition, the International Finance Corporation which is a part of the World Bank Group has expressed its interest to be an equity partner. Lastly, as the IPPB will not lend any money it would be shielded from the risks which the conventional banks face.

What are suggestion and forward for IPPB?

IPPB should quickly focus on technological up-gradation and staff training. It should have robust online platform for providing easier access to customers. Staffs will need extensive training to handle products like insurance and pension as they are different from the ones which India Post currently handles. Mis-selling of sophisticated financial products to the poor customers may jeopardize the initiative and the trust people place on India Post.

The idea of promoting cashless economy by setting up payment banks will work effectively only if some incentives are given for cashless transactions as the current system does not encourage cash less transactions. Here, the government should lure merchants and customers to opt for card based transactions by offering tax incentives. Further, additional tax can be levied on those merchants who opt for cash transactions.