Can only love for our postman ensure success for India Post Payments Bank?

People have been waiting eagerly for the launch of the India Post Payments Bank or IPPB, the largest among the eight that are likely to start operations over the next few months. Eleven entities received the Reserve Bank of India’s (RBI’s) in-principle approval for floating payments banks but three of them have left the field.

Originally, the department of posts, or DoP, which has been running the post office savings bank, wanted to set up a universal bank. It had even applied for a licence. The proposal was discussed at the Public Investment Board, which examines the investment plans of various ministries worth at least Rs100 crore, and it advised DoP to set up a “differentiated bank”. 

Accordingly, DoP applied to RBI, seeking a licence for a payments bank and got an in-principle approval on 7 September 2015. The bank has to be made operational by March 2017 but it seems the government wants it to be launched in January. This makes eminent sense in the wake of the demonetization drive— India’s financial sector is witnessing turbulence and the payments space is waiting to be grabbed with new ideas and innovations to give a big push to a cash-less economy.

IPPB will start with a Rs400 crore equity capital and a Rs400 crore grant from the government to set up a technology network in rural India. Incidentally, India Post, which is run by DoP, is not converting itself into a bank even as there have been many instances globally of post offices transforming themselves into banks. For instance, Germany’s Deutsche Postbank, originally a postal bank, is currently a private retail bank. In Japan, a large bank is run by its postal service but this is likely to be privatized next year.

Under the present scheme, there will be no conversion of any of the current activities of India Post for the payments bank. While the postal savings bank arm of DoP will continue its business, IPPB will come up as a new bank ostensibly for providing payments services to the masses in the hinterland. Indeed, India Post and IPPB will primarily cater to the same group of customers but the customers will have a choice—whether to continue to bank with India Post or go to IPPB for their savings deposits. Of course, the limit for a savings deposits in a payments bank is capped at Rs100,000.

IPPB is entirely owned by the government of India and will be run independently by a professional management even as DoP plays the role of a mentor.

Too Many Suitors

A Mint 12 January report (bit.ly/2hrDHEL) said IPPB was the “hottest game in town” and that 50 entities, including International Finance Corp., Barclays Bank, Deutsche Bank AG, Citibank NA and several state-owned banks have sent proposals to DoP for different kinds of partnerships. Going by the report, banks, insurance firms and asset management companies have been approaching IPPB to form equity partnerships, joint ventures and many other mutually beneficial arrangements.

None should be surprised by the enthusiasm that IPPB is generating. After all, DoP has a network of 154,939 post offices, the largest such network in the world. Its beginning can be traced back to 1727 when the first post office was set up in Kolkata. (The current postal system came into existence with the Indian Post Office Act of 1854.) As of 31 March 2015, 90% of the post offices were located in rural India—on an average 8,354 people are served by one post office, which covers 21.22 sq km.

IPPB has tremendous possibilities as it can bring millions of individuals and small businesses into the formal banking channel by offering savings accounts of up to Rs100,000 and current accounts with a special focus on micro, small and medium enterprises, small merchants, village panchayats, self-help groups, etc. It can also be the vehicle for the direct benefits transfer of social security payments of various ministries and pay utility bills, beside taking care of payments of various central and state governments and municipalities as well as colleges, universities and other educational institutions.

It can also play a major role in remittances—both domestic and cross-border—with a special focus on migrant labourers, low-income households and, finally, distribute third-party financial products such as insurance, mutual funds, pension and credit products. 

The post office savings bank has a customer base of at least 330 million and the outstanding balance under all post office schemes were at least Rs6.19 trillion (in March 2015). Clearly, with its network, it can give India’s largest lender, the State Bank of India— which, after the merger of all its associate banks with itself, will become one of the top 50 banks globally in terms of assets—a run for its money.

Technology is Key

The key to the success of IPPB will be its business plan and if that’s in place, technology. In October 2009, DoP awarded a 45-month information technology (IT) modernization contract to Accenture to design a new enterprise IT architecture and migrate the DoP to a more efficient, reliable and user-friendly IT system. Tata Consultancy Services Ltd bagged the contract for an end-to-end IT modernization programme to equip India Post with modern technologies and systems to enable it to offer more services to a larger set of customers in an effective manner. Infosys Ltd was employed to put in place the so-called core banking solution as well as constructing a rural connectivity network.

The India Post website says that in November 2012 the government approved a Rs4,909 crore IT modernization project for DoP for transforming DoP into a technology-driven department. While Accenture came in early, TCS and Infosys were awarded the projects in 2013.

I understand, till now none of projects have been completed. There have been glitches galore in the core banking solution while the rural network is only partially done even as the back-end work of TCS remains incomplete. There have been disputes and disagreements with the service providers and, in a few instances, even penalty provisions for delayed delivery have been invoked.

The 2015 annual report of India Post says the entire project is in implementation phase and also outlines the achievements made so far, which include computerisation of the north eastern region, establishment of a data centre and a disaster recovery centre and networking 27,736 departmental post offices, rolling out core banking solution in more than 17,000 post offices, and setting up 500 ATMs, among a few other things.

Clearly, not even half of the technology work has been done. So, how will IPPB revolutionalize India’s payments system? At the initial stage, EY helped DoP to prepare the project report for the bank, based on which the in-principle licence was given. Now, Deloitte Touche Tohmatsu India LLP is advising IPPB for setting up the bank. According to communications and information technology minister Ravi Shankar Prasad, IPPB will have 650 branches. They will be located at all district headquarters across India and connected to 155,000 post offices.

The Hub and Spoke Model

This is a typical hub and spoke model with one major difference —the IPPB branches or control offices will be the back office while the post office branches which, for all practical purpose, will play the role of business correspondents for IPPB, will be its front office. Every post office branch will host an IPPB desk to source business.

To make this model successful, it needs to have the right technology. I understand that DoP floated a request for proposal (RFP) to invite bids from various companies in July. For any large, complex project, an RFP is considered to be the heart and soul of the procurement. If the software firms are to be believed, there were a few thousands of queries by the initial bidders but only one entity, Polaris Financial Technology Ltd, made a bid which got cancelled. A fresh RFP has been recently floated but I am not aware how many bidders it has attracted. The cost of the project could be as much as Rs600 crore.

Typically, it takes at least a couple of months to evaluate the bids and then another six months to implement the project. If IPPB wants to launch its payments bank in January, how will it get the technology platform? Certainly, it cannot use the unfinished technology architecture of DoP. The only option left before it is to tie up with a bank for the time being for using the IT infrastructure till its own IT backbone is in place. Only the State Bank of India has the capability to support IPPB but will the nation’s largest lender extend a helping hand? I doubt it, as IPPB will directly compete with the State Bank. Probably, IPPB will explore a tie up with Punjab National Bank, majority owned by the government. It is large and is based in Delhi. If indeed such an arrangement is worked out to launch the bank even before its IT infrastructure is ready, this will be a unique instance of a bank launch in India.

In fiscal year 2015, India Post generated Rs11,636 crore in revenue, 8% higher than the previous year and its total gross expenditure was to the tune of Rs 18,557—11.6% higher than 2014. Post recoveries, the deficit was Rs6,259 crore, 14% higher than the previous year. A look at the average cost and average revenue of the most popular 18 items sold by India Post reveals that only two of them are profitable—competition post card and letter—and all the others, including the money order business, which charges a hefty fee, are losing money.

IPPB can make a new beginning only if it is run as a business entity and not a government department. Till now, a CEO has not been appointed (Vinod Rai of the Banks Board Bureau is in the process of identifying one). DoP has asked the public sector banks to recommend senior executives for responsible positions at IPPB but I am not sure how the response has been. Meanwhile, the Institute of Banking Personnel Selection has been looking around to recruit around 3,000 people.

Even if the business strategy and the right kind of people are in place for the launch, the technology will hold the key to the success of a payments bank. With its phenomenal reach across India, IPPB can do wonders—geo-mapping every inch of the country and making every kirana store, petrol pump, mandi its business correspondent, and usher in a revolution in the payments space when the government is pushing hard for a digital economy.

In his Independence Day speech at the Red Fort, on 15 August 2016, Prime Minister Narendra Modi said the Post Office is an example of our identity. “If any government representative gets the affection of a common man in India, it is the postman. Everyone loves the postman and the postman also loves everybody... We have taken a step to convert our post offices into payments banks. Starting with this, the payments bank will spread the chain of banks in the villages across the country in one go.”

Love for the postman alone cannot make IPPB a success, it needs to do much more.

Tamal Bandyopadhyay, a consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.