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Challenges facing IPPB

Kashmir Times. Dated: 9/11/2018 8:26:55 AM

The new initiative on India Post Payments Bank can speed up financial inclusion, but more needs to be done for rural borrowers

The fresh initiative launched by the BJP-government in the form of India Posts Payments Bank (IPPB), to be operated by the country’s age-old Postal Department can speed up financial inclusion of those located in rural and far flung areas. This format will act as a financial service provider for the people in remote areas through the large network of the India Posts spread across the length and breadth of the country, but the question arises why the small savings previously accepted by the Postal Department were discontinued a few years back. The National Saving Scheme (NSS) of the Postal Department was a big success for the people living in far flung and remote areas of the country. The same service was also used for transfer of money by the people working in various parts of the country to their home towns, villages and remote areas at a nominal charge. But these services were discontinued for the reasons best known to the central government. Moreover, The NSS was a big hit with the rural people, who wanted to create deposits for their children for the future. A huge sum of money was collected in the process and used for development purposes by the centre for many years. The closure of the NSS and other Postal Deposits forced the people to approach the Public Sector Banks (PSBs) for this purpose but the demonetization struck a severe blow to the aspirations of the people, because they had to save money in their hands for the time being when Postal Department refused the financial services to them. Sadly, these people from rural areas suffered the most due to demonetization carried out by the centre without application of mind two years back. Under the revived scheme, the government-owned payments bank will be able to accept deposits of up to Rs One lakh from customers but without the rights to use these funds to advance risky loans at higher interest rates. It plans to offer a variety of other financial services to people, including the holders of postal savings accounts that are worth over Rs 85,000 crore. The primary rationale behind the public payments bank idea is to help in the government’s goal of achieving financial inclusion by providing savings, remittance, and payments services to the rural and unorganised sectors of the economy. It is also expected that the payments bank idea will help reinvigorate the postal system, which has a wide network of branches across India. All the 155,000 post offices in the country are expected to be linked to the IPPB system by December this year. The payments bank will also have a digital platform that is expected to make financial services more accessible even from remote locations.
The big challenge before the new public payments bank will be whether it can earn the profits required to survive as a standalone business entity. Given the severe restrictions imposed by the Reserve Bank of India on how payments banks in general can deploy their funds, the odds seem to be stacked against the IPPB at the moment. The first wave of new payments banks that commenced business last year - Airtel, Paytm and Fino - have not exactly set the market on fire. The payments bank model, it should be noted, is still untested even though prominent private companies such as Airtel and Paytm have shown interest in the space. Banks have traditionally stayed away from the business of pure deposit banking, unless customers have been willing to pay for these services. The IPPB promises to pay an interest rate of 4 percent to its savings account customers, which is too low compared to what PSBs have been offering. To generate revenues, it plans to charge fees on money transfers and other financial services while investing idle customer deposits in safe government securities in order to earn interest. Whether this will be sufficient to cover interest and operational costs remains to be seen. In the meantime, the IPPB is also likely to face stiff competition from private companies, which are generally more apt in adapting to business realities and far more customer-friendly compared to the government-owned big entities. The increasing competition, will also put pressure on the IPPB’s revenues and margins. If this model succeeds, the new payments bank could usher in a new era of rapid financial inclusion across remote areas and rural India.