It must establish presence in the rapidly developing retail payments market
It is likely that RBI will grant payment licence to the postal department by August 2015. For years the postal department is serious about entering universal banking services. In fact, top management officials of the ranks of post master general and directors even underwent training at national banking institutes in 2006.
The journey towards the entry involved twists and turns. Although the roadmap was prepared in 2013, the proposal was opposed on the grounds that the department does not have desired credit management skills—one of the essential functions of a bank.
The proposal was not cleared even in 2014 at a time when Bandhan and IDFC bagged licences to set up a bank. But the situation has undergone a change. The current entry is likely to be as a payments bank wherein it will be restricted to demand deposits subject to a prescribed limit and will be allowed to issue ATM-cum-debit cards and prepaid card instruments, but not credit cards. The moot point is, how can it offer sustainable value proposition to its customers and stakeholders and how will its business model be distinctive?
Doubts have been raised about its success since it had a deficit of Rs 5,473 crore by 2013-14. Another concern is whether its entry as a payments bank contributes in reducing the deficit?
Postal banks exist in countries such as Germany, Tanzania, Japan and Sri Lanka, etc. In fact, they have been major players in retail banking globally and are able to leverage the core strength of distribution and customer portfolio. In terms of assets for 2014, the Japan Post Bank is ranked ninth globally, ahead of JPMorgan Chase and Royal Bank of Scotland, among others. It has a strong presence in the savings market and its credit products include overdraft which is secured majorly by time deposits. In addition, it offers credit cards.
The postal department is entering at a time when payments business is showing encouraging prospects—public sector banks (PSBs) face shortage of capital and are severely affected by NPAs, private banks are performaning, and non-banks are knocking the doors of banking business. Although PSBs could have leveraged their nationwide presence, the credit showed favour to the corporates despite the fact that retail banking in India offered significant prospects. For example, the contribution of personal loans for PSBs was 15% and for private banks it was 27% in 2013. Also, urban cooperative banks with a focus on mobile banking exhibit higher mobile banking transactions than some PSBs.
Payments business plays a critical role in banking and contributes to stability and lower capital needs. During difficult times, it acted as a shock absorber, as seen during the global financial crisis. A study suggests that a country with an overall payment efficiency is better placed than islands of excellence by select institutions. Payment business has implications on macroeconomic consequences and trade growth. Banking is undergoing major transformation in which payment business will continue to play a crucial role.
While network and trust continue to be strengths for the postal bank, there is a strong need to focus on payments bank success factors. The postal department, by 2013-14, had a sizeable business of R6,15,021 crore from savings bank schemes that include National Savings Certificate, Kisan Vikas Patra, savings account, recurring deposit account, etc. In a study done by this author, based on top management employee perceptions of the department, it obtained low ratings for aggressiveness, innovation and speed. Trust and convenience emerged as critical success factors for its entry into the banking business. Given the challenges faced by the postal department and its possible entry as payments bank, it is suggested that the postal bank follow an effective digitisation strategy supported by strong governance and enabling environment in order to make a visible presence in the rapidly developing retail payments market.
The author is assistant professor, National Institute of Bank Management. Views are personal