Tuesday, January 23, 2018

Long live India Post Payments Bank

Time will tell whether IPPB will succeed, but the confusion surrounding the payments bank arm of India Post is pretty high at the moment
India Post has been providing deposit services to a large number of small customers across the country; it also has a limited remittance service. Photo: Bloomberg

A June 2016 report in Mint described India Post Payments Bank (IPPB) as the “hottest game in town”. Some 50 entities, including International Finance Corp., Barclays Plc., Deutsche Bank AG, Citibank NA and several state-owned banks were jostling to form different kinds of partnerships with the department of posts, or DoP, the promoter of the payments bank. Apparently, commercial banks, insurance firms and asset management companies were making a beeline to form equity partnerships, joint ventures and many other mutually beneficial arrangements with IPPB.

It’s almost a year since its first two “pilot” branches at Raipur (Chhattisgarh) and Ranchi (Jharkhand) were inaugurated by finance minister Arun Jaitley and minister of state for communications Manoj Sinha through video conferencing. Where are these banks, insurance firms and asset management companies? How has IPPB been doing? IPPB has a customer base of a few thousands and its deposit kitty is less than Rs1 crore.

The objective of this column is not to write an obituary of this initiative—something I had done not so long ago for Bharatiya Mahila Bank Ltd, a misadventure of the erstwhile United Progressive Alliance-led government. Of the 11 entities that had got the Reserve Bank of India’s (RBI’s) in-principle approval to set up payments banks so far, only four—including IPPB—have gone live and three have opted out even as another four are busy sorting out regulatory, technical and business issues. There seems to be something inherently wrong with the business model itself. On top of that, IPPB, being government-owned, has unique challenges.

Going by the RBI guidelines for payments banks, there is a need for transactions and savings accounts for the underserved in the population. Also, remittances have both macroeconomic benefits for the region receiving them as well as microeconomic benefits for the recipients. Higher transaction costs of making remittances shrink these benefits. So, the primary objective of setting up payments banks is to “further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology-driven environment.”

Most of these services are currently provided by India’s mainstream banks, albeit with a degree of reluctance as these activities are seen to be loss-making. The challenge is how to make profits out of these services. IPPB started operations with a borrowed information technology (IT) platform from Punjab National Bank (PNB). How will a bank with very different objectives move ahead on the IT platform of a conventional universal bank? Can banking by surrogacy succeed in the payments space? A large number of bankers coming on board from PNB on deputation hasn’t helped the cause either.

Most regulatory constraints that universal commercial banks face are applicable to the payment banks as well even though their product line is thin and so are the revenue streams. IPPB, like all other payment banks (and small finance banks), is required to maintain 15% minimum capital adequacy ratio and also the cash reserve ratio, or the mandatory deposits with RBI on which it does not earn any interest (currently, it is 4% of deposits). On top of this, a payments bank needs to invest 100% of its demand deposits (it cannot take fixed deposits and recurring deposits) in government securities and deposits of scheduled commercial banks in the ratio of 3:1.

So, how will a payments bank make money? It cannot make money from deposits as the return typically is less than the cost of deposits; it can make money from payments transactions only if it has a robust, secured and comprehensive technology platform that enables clients and service providers to come together seamlessly and transact at an extremely competitive cost. The regulatory capital of Rs100 crore seems to be too little to create such infrastructure. RBI’s operational guidelines and regulatory controls give one the feeling that it wants to create banking fair price shops in the guise of payment banks.

IPPB currently offers savings bank deposits with 5.50% interest and a debit card to its customers in the two state capitals but there aren’t too many takers. Clearly, the postal bureaucrats in charge of the project do not have the nuanced understanding and skill to put up such a massive life-changing and technology-driven bank for the masses.

After using the PNB technology platform at the initial stage, IPPB is now looking for its own platform. DXC Technology (a former Hewlett-Packard Co. enterprise) will create the IT backbone. I wonder why only two bidders (DXC Technology and FIS) responded to the request for proposal, or RFP, issued by the DoP, and that, too, after cancelling the first RFP? For any large, complex project, an RFP is considered to be the heart and soul of the procurement. There were thousands of queries by the initial bidders but only one entity, Polaris Financial Technology Ltd, made a bid in the first round which got cancelled. Do the technology providers lack confidence in the viability of the business proposition?

It might be worthwhile to take a look as to what IPPB can offer which India Post cannot. India Post has been providing deposit services to a large number of small customers across the country; it also has a limited remittance service. So, IPPB needs to provide its customers with a robust and efficient payments facility without much complexity of transaction formalities, and at a cheap price.

Would this product line generate adequate revenue to have a healthy enough profitability to attract investors, or would it perennially depend on budgetary support?

It is not yet clear as to what is the business model being adopted by IPPB and whether the IT system being implemented would be comprehensive and adaptive enough to meet all the objectives.

Minister of state for communication Sinha, in a written reply to a question in the Lok Sabha recently, said IPPB expects to roll out 650 branches in April.

That’s good news.

But will they be sufficient to ramp up the operations? And, what will these branches do?

My understanding is that these bank branches (housed in India Post office outlets) will be the control office or back office while India Post, with its 150,000 branches, will be the corporate business correspondent of IPPB. In that sense, IPPB will be a faceless bank without any direct contact with its customers.

There are many questions to ask:

— Why has there been undue delay in starting any meaningful operations?

— Is IPPB’s operational dependence on the DoP too heavy, making it a weak protégé of the government department?

— Is the level of operational and administrative autonomy being enjoyed by IPPB adequate to frame its own strategy?

— Who is driving the project—the CEO of IPPB or executives of India Post?

(The CEO joined in October 2017, eight months after the project took off. None can miss the overwhelming footprint of the DoP executives who do not have either accountability or the acumen in defining the business strategy.)

— Is the operational architecture capable of infusing the much-required agility and efficiency of connecting India’s 650,000 villages and delivering banking services to millions at a very cheap cost?

What is worrying is that IPPB’s dependence on DoP is understood to be continuing even after the bank will be fully operational. For example, the connectivity of the bank for all its operations (proposed 650 offices, other access points, ATMs and hand-held machines to be used for transactions) will be through the existing DoP network. One can only hope that the technology shortcomings of DoP do not get replicated in the bank.

Time will tell whether IPPB will succeed, but the confusion surrounding the payments bank arm of India Post is pretty high at the moment. If the government aims to achieve deeper banking inclusion, it would be wise to let the board of IPPB and its top management decide on its strategy. Piggy-backing DoP will create an inefficient animal always looking for the indulgent patronage of its parent—far removed from India’s digital banking dream.

Finally, it looks like the feasibility of IPPB’s business is leaning heavily on being the gateway for all direct benefit transfers, earning a commission from the government. Is that a sufficient justification for a bank to exist? Instead of setting up IPPB, the government could have gone for a common back office service provider for all its transactions.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book, From Lehman to Demonetization: A Decade of Disruptions, Reforms and Misadventures has recently been released.

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