Is IPPB an underutilised opportunity?

When India Post was awarded the Payments Bank License in 2017, expectations were high, given the scope, reach and reach of the postal system. Scaling up an organization that already provides financial services and is trusted by hundreds of people for their savings, seems like the next logical step.

Nearly six years since then, if one evaluates the success of the experiment billed as the government’s financial inclusion campaign vehicle, the India Postal Payments Bank (IPPB) does not tick many boxes. It has yet to find its feet, and is stuck somewhere between aspiring to become a global bank and working amidst the restrictive framework of a payments bank.

It goes back to the year 2000 when the government wanted to turn India Post into a fully fledged bank. Understandably, the RBI was hesitant. When the opportunity to act as a payments bank arose, India Post seized it. But the Reserve Bank of India was still hesitating.

Since then, a lot has changed – be it the dynamics of the payments industry or the underlying technology. Once again, the industry is about to change with an overhaul of digital lending guidelines. New opportunities have opened up and reopened in the world of payments, the question is whether IPPB can fulfill the purpose or end up as a missed opportunity?

The bank caters to the bottom of the socio-economic hierarchy, and opens about 30,000-50,000 new accounts every day, with an average balance of INR 1,000. CASA has a balance of around Rs 6,500 crore as of March 2023.

But in terms of lending, these large granular retail deposits are underutilized. It’s hard to change perceptions until they are accepted and trusted as a full-fledged bank, which is unlikely to happen without being on the lending side — a battle all payments banks are fighting to outrun with fintech hookups.

After all, payments banks were conceived as digital platforms or intermediaries to encourage the payments and technology landscape of financial inclusion. The rise of UPI, payment platforms and digital players has defeated this purpose, leaving payments banks as an undifferentiated business model with their place in this ecosystem diminishing by the day.

However, there was a unique differentiation between IPPB and other payments banks. Not only did it have a customer base for a head start, but it was also the only government-backed one in a space otherwise dominated by big business. India has a network of 1.5 lakh post offices, of which 1.4 lakh are in rural areas. While regional rural banks and microfinance financiers may be IPPB competitors, they still are because they focus on small businesses or relatively high retail credit. Some of these entities are aspiring to transform into a microfinance or universal bank now.

IPPB would have stood out from the rest due to its ability to provide services to Level 3-6 clients at the lowest cost, something commercial banks and other lenders would have found almost impossible.

Then comes the hardest part. One of the authorization mandates for IPPB is that it must split back-end technology for post office and bank operations. After six years of existence, one isn’t quite sure how successful the IPPB will be in this matter. The bank recently had to stop consolidating digital savings accounts, due to operational challenges related to meeting digital KYC regulations. She was accessing nearly 3,000 digital accounts per day before the ban.

The IPPB acts as an intermediary, providing material support and customer service between a traditional bank that wants to lend but doesn’t have what it takes in terms of last-mile access, and a fintech that has the technological capacity to build customized solutions.

Combine that with some investment in technology modernization, better analytics and underwriting, and the challenges don’t seem insurmountable. There is certainly a case for a differentiated policy and organizational approach to the World Bank. Possibly as a specialist rural lending institution, given that the Bank is in discussions to convert some post offices into bank branches – this has been reported before Business line Last month.

For the government, it’s a win-win. The social sector financing burden is largely covered as cash benefits. Replacing this with credit will increase financial access and reduce the support burden. 80 percent of IPPB clients qualify under the MNREGA or are direct benefit transfer beneficiaries. Their credit requirements for income generation and consumption are minimal and short term in nature. The IIPB has, in the past, expressed interest in obtaining a global banking license. But this may not solve the goal of financial inclusion and also requires huge capital.

“Given the tangle of policy positions, it becomes difficult for a regulator somewhere to wade through it and come up with a clear picture. But for this kind of lending, especially in unsecured places, it takes big pockets,” said an industry expert.

At a time when the government is focused on reducing its holdings in PSU banks and consolidating positions, granting the license to a state-owned entity defies purpose. Privatizing the IPPB or siphoning off private equity could also be a controversial proposition. so what?

Any change in the IPPB model will require bureaucratic approvals in consultation with the Departments of Postal Regulations and Banking Regulations.

With a niche model of infrastructure financing through NABFID emerging, that could work in favor of IPPB. But with the system evolving disproportionately in the past five to six years, a sustainable long-term vision must be established before any changes to IPPB 2.0 are attempted to succeed.