The idea of specialised payment banks in India has gone from red-hot to lukewarm in a mere two years. Of the 41 players who applied in August 2015, the Reserve Bank of India awarded in-principle licences to 11. But after bagging the coveted licences, three players dropped out of the race, with just two of the remaining announcing concrete launch plans. It is heartening that India Post is pushing ahead with a pan-India plan to open 650 new branches and recruit 55,000 Gramin Dak Sevaks. While India Post is certainly among the stronger contenders, it will have its task cut out in making a success of this foray. It may need both a change in mindset and policy support to ward off stiff competition from private rivals.

Payment banks were conceptualised to offer services such as remittance facilities, bill payments and distribution of basic investment products as a means to financial inclusion. However, most players who won in-principle licences cited the lack of a robust revenue model to sustain operations. On the revenue front, payment banks are wholly reliant on fee income as they are expressly prohibited from lending activities. For capital though, they will need to compete with the entrenched universal banks for demand deposits, setting a 4-6 per cent floor to costs. The cap on deposits at ₹1 lakh per account and the mandate that they park 75 per cent of their deposits in government securities, a far stiffer requirement than for universal banks, impose severe constraints too. Revenue projections have been further hit lately on g-sec yields declining below 7 per cent, and alternative avenues such as mobile wallets and UPI apps offering low-cost or even free services. True, India Post still enjoys a competitive edge over such players owing to its unique connect with the bottom of the pyramid, thanks to a vast network of over 1.5 lakh post offices, 89 per cent of them in rural areas. As a government-backed entity that already handles retail savings, it also enjoys the complete trust of its constituents — a critical prerequisite in banking. But despite this, it cannot afford to ignore the serious competition posed by telecom players such as Bharti Airtel, who have a comparable footprint and are sinking far more capital into their rollouts. To compete with such players, India Post will have to keep an extremely tight rein on its costs and leverage on technology, and more than an army of staff to deliver last-mile services.

If the Centre is keen to see India Post Payment Bank succeed, it first needs to offer more generous funding support; the FY18 budget allocation of ₹500 crore appears quite inadequate. It should also look to supplement India Post’s fee income by routing its own payments through its network. A review of the overly stringent investment and deposit caps by the RBI would also not be amiss.