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India Post to Convert Payments Bank into Small Finance Bank

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India Post to Convert Payments Bank into Small Finance Bank

India Post Payments Bank (IPPB), belonging to the Government of India, has taken a decision to convert to a small finance bank. The basic idea behind this decision came in as a realization to bring about more financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities in the country.

As a Payments Bank it is not possible for India Post Payments Bank (IPPB) to achieve these objectives due to the inherent restrictions imposed by the central bank i.e., Reserve bank of India (RBI) on such “Payments Bank” in terms of not being authorized by RBI to issue loans and credit card. On converting IPPB to Small Finance Bank, the postal department will be able to meet its objectives of offering small loans to customer for which it plans to open one crore bank accounts in the next 100 days, as announced during the recent three day conference of Heads of Circles, Department of Posts.

What else should you know?

The announcement was made during the three day conference of Heads of Circles, Department of Posts, held at Srinagar, Jammu and Kashmir, from July 29-31, 2019. The “Conference”, which is a platform for policy formulation of Department of Posts, the Director General (Posts), Members of Postal Service Board, Chief Postmasters General from across the country along with other senior officers of Department of Posts participated. Apart from other important decisions taken during the conference the two major decisions were to adopt a 100-day action plan and also define a five-year vision to be able to match the department of posts with the PM’s initiative to form “New India”.

With the decision to convert to small finance bank, India Post will now partner with common service centers under “Digital India” programme, to provide a number of people-centric services like Banking, Remittance, Insurance, and Direct Benefit Transfer (DBT) – i.e., transfer subsidies directly to the people through their bank accounts, bill and tax payments at the post offices etc. India Post will also work towards providing micro-credit at the doorsteps to individuals and SMEs.

In November 2014, RBI had published the final guidelines for payment banks and subsequently in the budget session in February 2015, it was announced that India Post, along with other entities which had applied for license from RBI for Payments Banks and after having fulfilled all the requirements, were granted full licenses under Section 22 of the Banking Regulation Act, 1949 by RBI. It was further announced that India Post will deploy its existing wide network to run payments bank as IPPB. India Post Payments bank that was founded in 2018, it was the sixth approved payments bank by the RBI.

Learning more about payments banks in the country

IPPB Currently competes with some other players in the Payments Bank segment, such as Jio Payments Bank, Airtel Payments Bank Ltd, Paytm Payments Bank Ltd, and Fino Payments Bank Ltd.

As per the RBI regulation a payments bank can accept restricted deposits of up to INR 1 lakh per customer and can offer remittance services, provide Payment Gateways for mobile payments or transfers or purchases and other banking services like ATM/debit cards, net banking and third party fund transfers but cannot lent money in form of loans or issue credit cards. The RBI states that the main aim of Payments Banks is to improve financial inclusion by offering opening of small savings accounts, providing payments and remittance services to migrant laborers, low-income households, small businesses, entities in the unorganized sector and other customers.

IPPB’s journey so far

At the time of the launch, the government had expected IPPB to become profitable in two years. However recently, the Ministry of Electronics and Information Technology data reveals that India Post Payments Bank could achieve only 0.14% of the target set for digital transactions.

We have already seen the scope and restrictions of the Payments Bank. It is equally pertinent to understand the scope of services and restrictions for banks, with a Small Finance Bank license from the RBI.  Small Finance Bank can provide basic banking service of accepting deposits and lending money as loans and as a departure from the earlier concept of a Differentiated Bank, there will not be any limitations in the operative area of the small finance banks. RBI has till date approved 10 small finance banks of which, Au Small Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank are some of them.

In July this year, IPPB became a scheduled bank after its inclusion in the Second Schedule to the Reserve Bank of India Act, 1934. The inclusion permits IPPB to borrow money from the central bank and in turn to advance small loans to individuals and SMEs.

In order to realize its aim, IPPB intends to reach out to prospective customers like senior citizens, students, homemakers, urban migrants, farmer, direct benefit transfer (DBT) beneficiaries, influencers in the rural sector, the popular grocery (Kirana) stores and small businesses. In its bid to realize its objectives India Post aims at leveraging its reach through its existing network of 1.55 lakh branches across the country, in order to bring banking and financial services to people living in the remotest areas of the country.

With the change in the plans for the IPPB, the telecom minister advised the heads of circles to leverage technology, like AI, IoT and Cloud Computing, in order to strengthen Digital India for people-centric services.

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