Commodity trends

Maize

As per the “Second Advance Estimates of Production of Foodgrains for 2012-13”,...
Premium Content
Monthly Digital Access

Subscribe

Already A Subscriber?
Login
Yearly Digital+Print Access

Subscribe

Moneylife Magazine Subscriber or MSSN member?
Login

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation
Will the Post Office Bank be a boon or a bane?

The proposed post office bank can provide the much-needed basic banking facilities in a simple, friendly way to the illiterate and less literate people across the country. However, there is no definite answer whether the post office will shed its image and work culture to take on to professionally operated commercial banks

After the Women’s Bank, it is the turn of the post office (PO) vying for a licence to convert itself into a full service banking institution in our country.  In a country like India, where one-third of the population is outside the realm of banking, more banks are welcome, if it should help in achieving the objective of financial inclusion and bring into its fold all those who do not have access to basic banking facilities in the country. Judged from this criteria, the post office is ideally suited to don the hat of a full-fledged bank on account of its sheer reach into the countryside and the villages of India, which can never be reached for the next ten years through the existing banking institutions of our country.
 

What are the advantages of converting the post office into a bank?

Here are the figures of the post office compared with banks as on 31 March 2011.

  India Post   Commercial Banks
Number of offices 1,55,000 90,263
Rural Offices %    90 % 37 %
Population per office 7,200 13,400
Total no. of deposit accounts 26.45 crore 81.01 crore
Total deposits under all a/cs. Rs6.19 lakh crore Rs53.90 lakh crore

Source: www.rbi.org.in and www.indiapost.gov.in


Following are the advantages of converting the post office into a full-fledged bank:

1. The post office has a network of 1,55,000 branches throughout the country with 90% of its offices in rural areas. The reach of PO in the rural areas is unmatched, and can, therefore, serve as the best vehicle for financial inclusion of those who are outside the banking system at present.
 

2. Since the post office has an existing and established business in such large number of rural centres with basic infrastructure in place, it is very easy to convert them into a branch of the post office bank, which will result in considerable savings in both in terms of time and money for the new bank.
 

3. The POs are already in the business of maintaining savings accounts of over 10 crore people of our country. Besides, put together they have various deposit accounts of over 26 crore of the population, which can serve as a strong foundation for the post office bank to take off and build upon the support of these existing customers and reach break even much faster than a totally new bank.
 

4. Apart from savings accounts, a number of POs provide various financial services, including postal life insurance, pension payments, senior citizen savings scheme, electronic money transfer services, foreign exchange and a host of other para- banking services, which will add value to the potential customers of the PO bank that could develop into a financial supermarket under one roof in course of time.
 

5. In fact the post office is considered today as a meeting point for common people in a village and the village postmaster is a friend, philosopher and guide to many people. This, therefore, ideally fits the bill to be converted in to a bank for the common man.
 

What are the disadvantages of such a move?
 

1. The PO has been a department of the central government and has been a virtual monopoly, and hence it was run as a public service, without much regard for operational excellence, profitability and customer satisfaction.
 

2. The PO, though one of the oldest institutions in the country and a monopoly at that till recently, has been an institution working with a low key, as it was run as a government office rather than a commercial enterprise, and hence it could not make any visible, far-reaching impact on the life of common people at least in urban areas, though, postmen does play a prominent role in the life of people in rural areas.
 

3. With the laid back attitude of the entire organization and slow in innovation, the entire machinery of the PO is not used to the market dynamics of customer relations management and fierce competition prevailing in the field of banking and it will take a long time for the post office bank to come up to the level of public sector banks, who are not only in this field for many decades, but are aggressively planning for an expansion in rural areas, which might prove a tough competition to the post office bank, when set up.
 

4. Banking is a well regulated, closely monitored and highly sophisticated technology oriented operation requiring skilled manpower, resourceful management and highest levels of corporate governance. The post office bank should be able to gear itself for such upgradation of its operations to meet the expectations of the people, who are not only demanding today but also question the efficacy of customer service, whenever banks falter.
 

5. Whenever the post office becomes a bank, it is necessary to segregate those functions presently carried out by the post office into those permitted under the Banking Regulations Act, and those which are not, so that the post office bank complies with the regulatory requirements of the Reserve Bank of India (RBI). The form and nature of such segregation requires careful planning and smooth execution to ensure that the proposed bank is able to benefit from the existing businesses of the post office, without burdening itself with the avoidable excess baggage of the post office.
 

6. The capitalization of the post office bank will be the trickiest exercise for the government. According to the Times News Network, if the existing deposits of the post office are to be transferred to the proposed post office bank, or converting the existing entity itself into a bank, it will require huge capital estimated to be around  Rs55,000 crore to meet the regulatory requirements of the RBI. Whether the government is willing and able to shell out such a large capital for one bank, when there are demands from the existing public sector banks for additional capital, is the crucial issue, which requires to be sorted out before setting up this bank. The other alternative of setting up the post office bank as a new entity with a bare minimum capital of Rs500 crore required under the rules, will only result in negating the benefits of the existing business and the infrastructure to the new bank, thereby defeating the very objective of financial inclusion, for which this bank is proposed to be set up. How this catch-22 situation will be resolved will be the test of the government’s seriousness in proceeding with this proposal.
 

Conclusion
                                            

The thrust of today’s banking is financial inclusion, which is the basic requirement for the socio-economic development of our country. And with a large number of our people having no access to basic banking facilities, the only way to expedite provision of banking services in unbanked areas is to expand the existing infrastructure in a manner that can reach out to people as quickly as possible. In this inimitable task, the post office bank is the most suited organization, which can easily penetrate into the villages of our country much faster and be the change agent for improving the life of our people in the countryside.  But, whether the PO will be able to face the potential challenges and achieve these lofty objectives can only be realised with the efflux of time, and its true performance as a bank will be the ultimate litmus test. 
 

If the proposed post office bank continues in its path of simplicity and provides the much needed basic banking facilities in a simple, friendly way to the illiterate and less literate people, without the paraphernalia of booted and suited relationship and wealth managers mis-selling toxic and exotic products to the village folk, it will be a great boon for our country men and women. But considering the intricacies involved in converting the PO into a full service bank that can effectively, efficiently and successfully compete with the centuries old public sector banks and the existing and upcoming high-flying private sector banks, whether it will be boon or a bane for the common people can only be known after it is up and running, as the saying goes, “the proof of pudding is in eating”.
 

(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’).

User

COMMENTS

ashwin bahl

4 years ago

bane

Satish

4 years ago

If i remember right the Post office already has savings accounts,
Recurring deposit schemes and fixed deposit schemes like banks, the only facility missing i think is cheques and loans, if this can be done under post office itself and marketed well what else is needed ?

REPLY

MK Gupta

In Reply to Satish 4 years ago

Cheque facilities sans MICR are also there.

nagesh kini

4 years ago

Gurpur has clearly delineated the pros and cons.
It is no denying the fact that India Post has a much greater presence and penetration in rural Bharat. The locals appointed have a better connect with the simple village folk who don't want any Relationship Managers to mis-sell songs. All that they want is a safe and secure place to park their savings and to access them as and when needed.
With their past record of years into Postal Savings, the RBI could possible rethink on the minimum capitalization norms and even revalue their vast properties like Mumbai's GPO a Heritage Building. This itself will add up by a few crores

Welcome India Posts Bank - only deposits and advances there against.

The brick-n-mortar banking continues without the need for any Banking Correspondent or fancy Relationship Manager but a smiling Friendly

Neighbourhood PM - Post Man or Post Master not Prime Minister! I've found a marked change in the mind set in the employees of MTNL/BSNL and this is bound to happen in India Posts too.

nagesh kini

4 years ago

Gurpur has clearly delineated the pros and cons.
It is no denying the fact that India Post has a much greater presence and penetration in rural Bharat. The locals appointed have a better connect with the simple village folk who don't want any Relationship Managers to mis-sell songs. All that they want is a safe and secure place to park their savings and to access them as and when needed.
With their past record of years into Postal Savings, the RBI could possible rethink on the minimum capitalization norms and even revalue their vast properties like Mumbai's GPO a Heritage Building. This itself will add up by a few crores

Welcome India Posts Bank - only deposits and advances there against.

The brick-n-mortar banking continues without the need for any Banking Correspondent or fancy Relationship Manager but a smiling Friendly

Neighbourhood PM - Post Man or Post Master not Prime Minister! I've found a marked change in the mind set in the employees of MTNL/BSNL and this is bound to happen in India Posts too.

A BANERJEE

4 years ago

What Mr. Gupta writes cannot be ignored. It is really a matter of conjecture as to what shape these postal banks are going to take. With the present infrastructure of majority of the post offices in the non-Metro cities, towns, semi-urban places and the rural areas, it is indeed doubtful what is going to be the future of these banks, when commenced. Would it be reasonable, as has been mentioned, to start these at all with the POSB interest rates slashed down again by the Govt.?

MK Gupta

4 years ago

Given the educational level and the mindset of the postal employees and the highly graded bureaucratic set up of the Indian Postal Service, it seems rather impossible to expect Postal Banks to be better than the post offices which of course are better than what these were earlier. I am not aware of the training being imparted or proposed to be imparted to the present employees including the officers whose mindset has not gone far ahead of the old postal culture. It is also not known if the proposed post offices will be run by specially trained and recruited BABUS like the present recalcitrant people manning the post offices which cannot be even accessed through emails as even chief/senior post masters and even Senior Supdts of Post Offices (like the Delhi's South Divn SSPO in Lodhi Road) have no mail contact IDs. But even the most important question is: who will have control over these banks-the RBI or the GoI? With the Postal Savings Bank Interest slashed from 13.8% once (7-8 years back) to a meagre 8% or so, what is the future of these banks and what after all is the justification for opening these banks? What about safety and security aspects as regards the rural post offices or even those in the semi-urban areas ? Will then each post office will have vaults and armed guards and internet connections/contacts? And what will happen to those post offices in the dacoity prone and Maoist areas? Have these aspects been examined by the authorities? One really wonders.

Insolvency in Cyprus and China and reassessment of risk

Governments are happy to shift bad debts onto taxpayers, or even better to some other country’s taxpayers. Investors have felt safe that there is no down side, no risk. But two insolvencies in recent weeks may change these expectations and changed expectations are contagious

Since the beginning of the financial crises five years ago, governments all over the world have used every means possible to stimulate their economies. The methods include infrastructure projects, forced loans, lower interest rates, and bank bailouts. They also include promises to “do whatever it takes” in Europe to recent promises to kill deflation in Japan. Perhaps the most famous is the eccentric monetary policies of the United States Federal Reserve—known as quantitative easing or QE. If the measure is global equity markets, the avalanche of free money has been very effective. But if we look at the global economic picture, we might feel differently. The policies have fallen far short of expectations.

 

Government policy both fiscal and monetary has been effective for equity and bond markets for probably one reason—trust. Markets assume that anytime there is even a hint of a downturn, central bankers and occasionally governments will appear like super heroes and make everything right. Governments or banks can print trillions of dollars. Regardless of the cost, they are happy to shift bad debts onto taxpayers, or even better some other country’s taxpayers. Investors have felt safe that there is no down side, no risk. But two insolvencies in recent weeks may change these expectations and changed expectations are contagious.

 

The first and most obvious insolvency was Cyprus. At first glance Cyprus looks like an isolated case. Cyprus is a small country. Its economy makes up less that 0.2% of the Eurozone. Its population is about 1,100,000, slightly more than Rhode Island, my home state, the smallest state by land area in the US. Cyprus also looks different because it was running a tax haven for Russian flight capital. The financial sector was seven times its GDP. But this is not unusual. Both Malta and Ireland have similar financial assets to GDP ratios. In Luxembourg the bank assets are a massive 22 times GDP.

 

Cyprus’s size did not help. Bailing out Russian depositors did not sit well with German and other northern European taxpayers who would be stuck with the bill. Letting a small country’s financial system and economy go down the drain is not a major political liability. Quite the contrary, with many voters it will no doubt be a plus. So a deal was worked out under which Cyprus’s two main banks, Laiki and the Bank of Cyprus, were restructured. Laiki was wound up. Its bad loans were placed in a bad bank while its insured deposits were transferred to the Bank of Cyprus. Laiki’s 4.2 billion euros of uninsured deposits, bondholders, senior as well as junior, will most likely be wiped out. The Bank of Cyprus will be recapitalized, but partially at the expense of uninsured depositors who may take a 60% loss on 10 billion euros worth of assets.

 

So Cyprus’s problem is solved, except for one thing—risk. Cyprus is not the only country in the European Union (EU) with shaky banks. As part of an earlier deal to stop the ongoing financial crisis, the EU countries agreed to negotiate a Eurozone wide bank banking union. This would have included supervision, resolution and deposit insurance which some consider a minimally sufficient condition to make a divergent monetary system work. But for now this is off the table. So investors in any of Europe’s problem banks both in little countries like Slovenia or larger countries like Spain or Italy might be reassessing their risk.

 

It also brings into question the European Central Bank President Mario Draghi’s famous promise. Banks will not be saved by whatever it takes. If banks can’t or won’t be saved at all costs, as investors expect, then countries may not be either. This is a massive change. Investors and depositors in unsteady banks may feel the need to flee to safety the next time markets begin to question their solvency. It also won’t be so easy to convince them that everything is alright. All they need to do will be to look at the investors in Cypriot banks to guess their possible fate.

 

The other insolvency was a bit more obscure but not any less important. For the markets the bankruptcy of Suntech Power Holdings (STP) did come as a great surprise. The cut back on government subsidies coupled the massive Chinese oversupply has crippled the solar industry. The situation got really out of hand thanks market distortions of government support in China, US and other countries, whose politicians were all eager to encourage a nascent technology. The bankruptcy of Suntech was just considered a sequel to the bankruptcy of the US company, Solyndra, which defaulted on a $535 million government loans in 2011.

 

But the bankruptcy of Suntech was different. This was not some local Chinese company. This was a company whose stock was listed on the New York Stock Exchange. It had issued not only internationally-listed equity, but $541 million in bonds. It was also different because it was the first company from mainland China to go bankrupt and default on its bonds since the bankruptcy of Guangdong International Trust and Investment Corp (GITIC) in 1999. There have been other defaults notably that of FerroChina in 2008 and Asia Aluminum in 2009, but these never resulted in a mainland bankruptcy, probably because of what happened to GITIC.

 

GITIC was basically the investment arm of the province of Guangdong. Investors assumed that as a government agency its bonds were backed by not only the provincial government, but also the government in Beijing. They weren’t. As I wrote in my book Investing in China, (2002) GITIC was declared bankrupt in a summary hearing by a lower court in Guangzhou. The Chinese assumed that international investors would just take their lumps and that would be that. They didn’t. Money invested in China froze up overnight.

 

It took months of assurances by the government to restore trust. In the process they bailed out several other investment trust companies which were in the same situation as GITIC. But it was too late for GITIC’s investors. Although it is very hard to actually know, my guess is that they received about 2% on the dollar. Since then China hasn’t repeated the mistake.

 

Instead the authorities have gone to great lengths to avoid any hint of bankruptcy as I outlined in my recent piece Turning Japanese: Avoiding insolvency. Like their European counterparts the Chinese have bent over backwards to insure investors that there was little or no risk in investing in Chinese companies.

 

It is not like the Chinese did not try to save Suntech in the usual way.  Most companies seek bailouts from local banks and governments. Suntech was no exception. Last September it received a $32 million loan from the government of Wuxi. It also received loans from the China Development Bank, like other solar companies in trouble.

 

Before the bankruptcy commentators assumed that the company would receive a $1 billion bailout. Even highly placed and connected Chinese made this assumption. Shi Dinghuan, president of the Chinese Renewable Energy Society and an adviser to the State Council, said “The government won’t let this well-known company enter catastrophe easily.” But like the Cypriot banks, the government did let Suntech go under. They didn’t do whatever it took. The financial cavalry never arrived. The Chinese authorities apparently feel that either international investors will shrug it off or China doesn’t need them anymore. Whatever the reason, the assumptions about risk and the safety of Chinese bonds are basically wrong.

 

There may be trouble if and when investors wake up to this fact. But it is not just China. The size of the trouble has been exacerbated precisely by the actions of the government agencies like the Federal Reserve which have been doing their utmost to assure investors. By flooding the world with money investors have gone on a hunt for yield. This has resulted in the demand for bonds from some very exotic places. Since 2010, the governments of Mongolia, Belarus, Zambia, Georgia, Bolivia, Tanzania, Paraguay, Angola, Nigeria, Albania, Montenegro, Jordan and most recently Honduras have all been able to issue bonds on global markets for the first time.

 

The reason why these countries have been barred from credit markets is simple. They weren’t worthy. But now thanks to the Fed, money is pouring in, but where it goes no one knows. It doesn’t always stimulate growth. Problems are already evident in Thailand, Malaysia, Hong Kong, South Korea, Brazil as well as China. While emerging market bonds have been booming, emerging markets have been slowing. While the S&P reached new highs, emerging stock markets suffered their worst drop since 2008. Most Chinese companies are known for steady profits. But now even huge Chinese companies like ZTE, Aluminum Corporation of China and COSCO, China’s largest shipping company, are suffering losses.

 

Markets suffer their greatest corrections when they realize that their most cherished assumptions about risk are simply wrong. This occurred in 2008 when investors belatedly discovered that sub-prime CDOs weren’t safe after all. As the economic cycle grows increasingly old, it appears that the credit issues are repeating themselves. It is difficult to determine when and what provokes investors to reassess their assumptions, but once the contagion starts it can move very quickly. Investors always feel that they will be able to get out before the storm hits. But these are not stocks that can be sold in an instant. These are bonds which are famously illiquid and at some point it will all end in tears.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)