Nearly Three Years On, India Post Payments Bank In Violation Of Key Licensing Provision

RBI had asked India Post Payments Bank to fold in a part of the deposits held by the postal department. Has that happened?

Prime Minister Narendra Modi at the launch of India Posts Payments Bank. (Source: India Post)
Prime Minister Narendra Modi at the launch of India Posts Payments Bank. (Source: India Post)

"The postman is now a bank in himself," Prime Minister Narendra Modi said at the launch of India Post Payments Bank on Sept. 1, 2018. The launch of the payments bank, to be built on the vast network of the postal department, was one of the Bharatiya Janata Party-led government's pet projects intended to further India's financial inclusion efforts.

Ironically, the payments bank, now in its third year, is suffering precisely due to the linkages with the Department of Posts that it was supposed to benefit from.

Key steps in strengthening the payments bank, such as folding in a part of the deposits held by the postal department, have been stymied over the past couple of years, according to be people familiar with the matter.

This, in turn, has left the payments bank in violation of a licensing condition laid down by the Reserve Bank of India at the time the approval was granted.

As part of its licence, the banking regulator had said that all financial services directly under the Department of Posts, which can be offered by the payments bank, must be folded into India Post Payments Bank within two years of operations. This is in keeping with the regulator's broader thinking that a business which can be conducted by a banking company should not be done outside it by the same set of promoters.

This condition is yet to be met.

The license letter, issued by the RBI on Jan. 20, 2017, was accessed by an employee of India Post Payments Bank through a Right To Information query in March and shared with BloombergQuint.

India Post Payments Bank and the RBI did not respond to queries mailed on Monday. When contacted, J Venkataramu, chief executive officer of India Post Payments Bank, declined to comment.

What Needs To Be Transferred?

Two people with direct knowledge of the matter told BloombergQuint on the condition of anonymity that the RBI's licencing condition was interpreted, by the board, to mean that the savings account business under the Department of Posts would need to be transferred to the payments bank.

As per the latest available annual report for the department, there were 19.09 crore savings accounts with deposits worth Rs 1.15 lakh crore, as of March 31, 2020. These deposits, with a minimum ticket size of Rs 500 per deposit, carried an annual interest rate of 4%, as per the department's annual report.

Apart from the savings account portfolio, the Department of Posts also holds fixed deposits worth Rs 1.66 lakh crore and recurring deposits worth Rs 1.14 lakh crore.

Including monthly income schemes, public provident funds, savings certificate schemes, senior citizen savings scheme and deposits under the Sukanya Samruddhi accounts, the total funds managed by the department stands at over Rs 10.66 lakh crore, as per the annual report. However, in the case of these schemes, the Department of Posts acts as an agency of the government.

Standalone, India Post Payments Bank had outstanding deposits worth Rs 855 crore as of March 31, 2020, compared with Rs 94 crore a year ago, according to its annual report. All of these are in the form of demand deposits, popularly known as current account savings account deposits, with no fixed deposits on its balance sheet.

According to the bank's website, it pays 2.75% annual interest on savings account deposits.

On the deposits it carried, the payments bank paid interest worth Rs 13.54 crore during FY20, higher than Rs 85 lakh a year before, the annual report said.

Why Is The Transfer Delayed?

The reasons behind the delays give an insight into why India Post Payments Bank had failed to take off as anticipated.

The Department of Posts, which originally wanted a universal banking license, but was handed a payments bank license, hasn't been forthcoming in the transfer process, the first of the two people cited earlier said.

There's some justification to the reluctance.

For its size and financial performance, the India Post Payments Bank may not be ready to handle the volume of business which the postal department manages. The bank's treasury revenue in the year ended March 2020 stood at Rs 46 crore, marginally lower than Rs 46.4 crore a year before.

Managing over Rs 1 lakh crore in deposits would entail wider and more complex treasury operations.

But there are other reasons for the delay which have to do with inter-departmental turf wars.

The transfer of business hasn't yet been completed because the Department of Posts has been reluctant, claimed the first person cited earlier. The government is required to issue an order for transfer of this business to the payments bank, which it has not yet done, this person said.

Even if the order is passed, customers will have to be given a choice as to whether they want to continue with the post office or move to the payments bank. The payments bank board is uncertain whether the ground staff will be adequately prepared to handle the transition, this person added.

Poor Financial Performance

India Post Payments Bank has also not been able to stabilise its finances, a concern that plagues its peers as well.

Operating expenditure in FY20 rose to Rs 488 crore, compared with Rs 270 crore a year ago.

The largest contributors to the operational expenditure are employee expenses worth Rs 264 crore, postage, telegram and telecommunication costs worth over Rs 40 crore and infrastructure cost worth over Rs 40 crore.

This led to a loss of Rs 334 crore in FY20.

The poor cashflow in the payments bank has led to an impact on its employees too. In February, BloombergQuint reported that the bank's chief executive officer had written to employees announcing a stay on the implementation of the Eleventh Bipartite Wage Revision. This was after employees had already received revised salaries for November and December 2020.

This action had prompted employees to file a petition with the Delhi High Court demanding that it be rolled back, BloombergQuint had reported.

At a board meeting held on June 30, the payments bank's board decided to keep pay revisions on hold till it receives approvals from the Ministry of Finance and Ministry of Communication & Technology, according to the first of the two people quoted above. A query was sent to India Post Payments Bank on Thursday and responses are awaited.

Abizer Diwanji, partner and head of financial services at EY, thinks the flaw is in the model first and then in the execution.

"The payments bank model has been defective from the beginning. It's clear from the number of people who have shut down their business," he said. "There is no money to be made in float and the money they collect as deposits is also to be deposited only in government securities where they can't make margins."

"In the case of India Post Payments Bank specifically, there is also the issue of a bad start," he said. "The strategy of leveraging the postal department seems to have not worked out as envisaged."

The story has been updated with the India Post Payments Bank board's decision to continue with the stay on pay revisions.