Post office solutions: the challenges facing India Post Payments Bank 

Mains Paper: 3 | Economic Development  
Prelims level: India Post Payments Bank
Mains level: The new India Post Payments Bank can hasten financial inclusion, but detailing is key. Critically Analyse.  

Introduction

• Prime Minister Narendra Modi launched the India Post Payments Bank (IPPB), a financial service provider that will operate under the country’s age-old postal department.
• The government-owned payments bank will be able to accept deposits of up to ₹1 lakh from customers but without the rights to use these funds to advance risky loans at higher interest rates.
• It, however, plans to offer a variety of other financial services to people, including the holders of postal savings accounts that are worth over ₹85,000 crore. 

Objectives of IPPB? 

• 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 hoped 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 as early as in 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.

Challenges faced by IIPB

• A big challenge facing the new public payments bank is whether it can manage to earn the profits required to survive as a standalone business entity.
• The severe restrictions imposed by the Reserve Bank of India on how payments banks in general can employ 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, for a good reason. 
• The IPPB promises to pay an interest rate of 4% to its savings account customers. 
• 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. Meanwhile, 

Way forward

• The IPPB is also likely to face stiff competition from private companies, which are generally more nimble in adapting to business realities and far more customer-friendly compared to the government-owned behemoths. 
• To increasing competition, the IPPB’s revenues and margins are also likely to come under pressure. 
• Yet, if it succeeds, the new payments bank could usher in a new era of rapid financial inclusion across rural India.

UPSC Prelims Questions: 

Q.1)  Which of the following restrictions has been placed on payments banks as compared to other commercial banks?
1. Payments banks cannot issue credit cards and cannot grant loan/ credit out of their own books of accounts.
2. The payments bank will be restricted to holding a maximum balance of Rs. 1,00,000 per  individual customer.
3. Under Cash reserve ratio Payments Bank will be required to invest minimum 75 per cent of its demand deposit balances in Government securities/treasury bills.
Codes:
a)  1 and 3
b)  Only 2
c)  1 and 2
d)  All
Ans: D

UPSC Mains Questions:
Q.1) India Post Payments Bank (IPPB) is a historic decision towards achieving the goal of financial inclusion. Discuss.

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