India Post has now launched its much-anticipated payments bank, which will seek to leverage the post office’s 150,000-plus branches across India to bring financial services to the masses. The idea behind the scheme is that many rural consumers will continue to prefer human or physical interaction with a bank to the digital-first approach being taken by some other such entities. At first, India Post Payments Bank, or IPPB, will start with 650 branches, although 300,000 postmen are being trained to become banking correspondents in addition to their regular duties. This, it is hoped, will reinvigorate the post office, which has been suffering both financially and in terms of market position in its traditional services. In 2016-17, India Post lost almost Rs 120 billion. Its problems extend to both its staffing and the efficiency of its processes. Yet it is far from clear whether IPPB as currently designed will be able to fix this problem.
Payments banking is a low-margin activity, at least as envisaged by the Reserve Bank of India. Payments banks such as IPPB cannot lend against their deposits in the manner of regular banks — they have to largely hold government paper instead. Deposits are limited to Rs 100,000. Meanwhile, the costs of a model IPPB intends to use — with physical branches and trained correspondents — are not inconsiderable. Thus the sustained profitability of IPPB remains an open question. The bank will provide an interest rate of four per cent, lower than initially believed. It intends, apparently, to make up some of the revenue it needs through charging for services. There are close to 50 charges and restrictions planned by IPPB. It cannot offer ATM cards, and other digital money transfers will be charged. The consequences of this decision for the uptake of IPPB accounts might be severe. The Indian consumers are extremely cost-conscious. They might be turned off by even small fees. Nor will restrictions on their access to their own funds go down well.
However, IPPB does have access to one major resource: The post office savings accounts. There are almost 170 million such customers of the post office savings system. IPPB’s management hopes to link these savings accounts with the payments accounts that it manages. When payments into an IPPB bank account top Rs 100,000, they will be allowed to sweep it into a post office savings account. This is a significant advantage over what other payments banks can do. There, too, sweep-out accounts are permitted, but they have to be linked to a bank account from another financial services provider. In effect, other payments banks act as banking correspondents for scheduled commercial banks, but have no control over the funds once they are swept out. In this case, however, India Post will have control over both the payments bank and the savings account — and, of course, post office savings themselves are not regulated like scheduled banks, and do not come under the ambit of the RBI. This aspect of IPPB might cause regulatory trouble later on and should be more carefully studied.