This might be just a joke, but it does reflect the deep
frustration among bankers at being mandated to carry out an enormous number of
the government’s social objectives.
There has been a lot of commentary asking the government to
reduce its involvement in Public Sector Banks (PSBs). The government has been
asked to reduce holdings, step away from appointments of chairmen and board of
directors, and to not interfere in bank schemes such as the farm loan waiver or
mandatory priority sector lending, But nobody is talking about the government
using PSBs to roll out its various populist schemes, which will affect their
day-to-day operations in the short run, and its overall competitiveness in the
long run.
A quick search will reveal that the number of government social
schemes that use PSBs is uncomfortably high. The schemes cover a range of areas
such as insurance (Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan
Jyoti Bima Yojana, etc), pension (Atal Pension Yojana), financial inclusion
(Pradhan Mantri Jan Dhan Yojana), and priority sector lending, which includes
various schemes under agriculture, micro and small enterprises, education,
housing, export credit and others.
Ambitious targets
Each scheme usually comes with countrywide targets set by the
concerned ministry, which are then distilled and divided into smaller numbers
for each bank branch. For example, the Pradhan Mantri Jan Dhan Yojana (PMJDY)
has an ambitious target of opening 10 crore accounts, to be divided among the
banks. One PSB was assigned a target of 1 crore accounts and one of its
branches in Bengaluru had a target of 1,000 accounts to be opened within a
week. Such targets are rarely met, and even if they are, they rarely match the
desired outcomes, due to complete misalignment of incentives. With a severe
dilution of Know Your Customer norms, there is enough evidence about the actual
success of the scheme — 75 per cent of the accounts are empty, multiple accounts
have been opened by single persons, and there are huge costs that the banks
bear (Rs. 200 per bank account).
But what is perhaps the biggest cost to banks is the opportunity
cost they lose in implementing these schemes. Ambitious targets and time frames
take up precious time that could have otherwise been used to carry out the
original mandate of the banks — accept deposits and make loans. All normal bank
activity comes to a standstill during such public drives, with employees being
swamped by the targets. Even big business clients are asked to wait until the
pressure eases. The PMJDY drive halted all normal banking activities for an
entire week.
At a time when public sector banks are finding it hard to beat
the competition posed by deep-pocketed foreign and private sector banks, they
can ill afford to let their biggest customers take a back seat while they meet
social goals.
Relevance of India Post
However, since social security measures are important, how about
using another government-run behemoth, India Posts, for this task? As it
struggles to find relevance in the digital age, perhaps the answer lies in
reusing its enormous reach for delivering social schemes. In the U.S., this
idea is being examined, and the U.S. Postal Service presented a report this
month outlining exactly how postal banking could promote financial inclusion
while turning in a neat profit for the service.
Two criteria have to be considered: reach and capability. India
Post has a network of over 1.5 lakh branches across India, a reach that far
exceeds all the PSBs combined. Of the 1.5 lakh branches, about 1.4 are in rural
areas, compared to the combined 23,000 rural branches of the public sector
banks.
India Post already runs the Post Office Savings Bank account,
which handles cash worth Rs 6 lakh crore per year across 28 crore accounts. The
service has also been quite successfully handling cash payments in the Mahatma
Gandhi National Rural Employment Guarantee Act — nearly 5.6 crore MGNREGA
accounts, and wages amounting to nearly Rs. 10,000 crore have been disbursed to
beneficiaries through 97,709 post offices across the country. Of the three main
building blocks of financial inclusion — cash storage, disbursing payments, and
giving credit — India Post has already shown that it is quite capable of
handling the first two.
In the longer run, for India Post to play a bigger role in the
fulfilment of the government’s social objectives, the following steps can be
taken: First, one of the smaller and healthier PSBs could be merged with Indian
Post so that the latter acquires a banking licence and a trained workforce.
Second, incentives could be offered to the present workforce to sit for the
banking exams. Third, banking exams could be made a requirement for a percentage
of the new recruits; and, finally, the banking division of the post office
could be brought under the RBI’s regulatory purview.
With this, India Post can expand from financial inclusion to
handling insurance and pension accounts, priority sector lending in rural
areas, and many other financial functions as well.
Some post offices around the world have undergone this
transformation quite successfully. The Royal Mail of the U.K., for example,
does all the things a bank does and additionally even provides telephone and
broadband service.
This move could free public sector banks from being yoked to
social sector objectives and allow them to become competitive and function
freely in the highly cut-throat banking sector. Simultaneously, it could
harness the potential of the post office network in India.
June 03, 2015
Kalaivaraikalai
