When India Post was granted payments bank licence in 2017, expectations were high, given the scale, reach and access of the postal system. Expanding the scope of an institution that already offered financial services and trusted by crores of people for their savings, seemed like the logical next step.

Nearly six years since, if one takes stock of how far the experiment touted as the vehicle for the government’s financial inclusion drive has succeeded, India Post Payments Bank (IPPB) doesn’t tick many boxes. It hasn’t found its feet yet, and is stuck somewhere between the aspiration of becoming a universal bank and operating amid the restricting framework of a payments bank.

It goes to 2000 when the government wanted to convert India Post to a full-fledged bank. Understandably, the Reserve Bank of India was reluctant. When the opportunity to operate as a payments bank emerged, India Post seized it. But the RBI was still reluctant.

Since then, a lot has changed – whether it is the dynamics of the payments industry or the underlying technology. Once again, the industry is at a cusp of change with the overhaul of digital lending guidelines. New opportunities have opened and re-opened in the payments world, and question is whether IPPB can fulfil the purpose or end up as a wasted opportunity?

The bank caters to the bottom of the socio-economic pyramid, and opens about 30,000-50,000 new accounts every day, with an average balance as low as ₹1,000. The CASA balance stood at around ₹6,500 crore as of March 2023.

But restricted on the lending side, these high-volume granular retail deposits are lying underutilised. It is difficult to change perceptions to be accepted and trusted as a full-fledged bank, which is unlikely to happen without it being on the lending side – a battle that all payments banks are fighting to bypass through fintech tie-ups.

After all, payments bank was envisaged as digital platforms or intermediaries to encourage payments and technology landscape for financial inclusion. The advent of UPI, payments platforms and digital players has defeated this purpose, leaving payments banks as an undifferentiated business model with their place in this ecosystem dwindling by the day.

Yet, there was a unique differentiation between IPPB and other payments banks. Not only did it have the customer base for a head-start, but it was also the only one backed by the government in a space, which was otherwise dominated by large corporates. India has a network of 1.5 lakh post offices, of which, 1.4 lakh are in rural areas. While regional rural banks and microfinanciers could have been IPPB’s competition, they still aren’t because they focus on small businesses or relatively higher ticket retail credit. Some of these entities are aspiring to transition into a small finance or universal bank now.

IPPB could have stood apart from the rest due to its ability to delivery services to Tier 3- 6 customers at the least cost, something commercial banks and other lenders would have found almost impossible.

And then comes the trickiest part. One of the licensing mandates for IPPB is that it should bifurcate backend technology of the post office operations and the bank. Six years into its existence, one isn’t very sure how far IPPB has succeed on this. The bank had to recently stop onboarding digital saving accounts, owing to operational challenges on meeting digital KYC regulations. It was onboarding nearly 3,000 digital accounts every day before the embargo.

IPPB operates as an intermediary, providing physical and customer service support between a traditional bank that wants to lend but does not have the wherewithal in terms of reaching the last mile, and a fintech that has the technology capability to build customised solutions.

Combine that with some investment in technological upgradation, better analytics and underwriting, and the challenges don’t seem insurmountable. There certainly is a case for a differentiated policy and regulatory approach for IPPB. Possibly as a specialised rural lending institution, given the bank is in discussions to convert some post offices to bank branches – this was reported by businessline last month.

For the government, it’s a win-win. The social sector financing burden is largely met as cash subsidies. Replacing this with credit will increase financial access and reduce the subsidy burden. 80 per cent of IPPB’s customers are eligible under MNREGA or are direct benefit transfer beneficiaries. Their credit requirements for income generation and consumption are minimal and short term in nature. IIPB, in the past, expressed its desire for a universal bank licence. But that may not solve the objective of financial inclusion and also requires huge capital.

“Given the enmesh of policy stands, somewhere it’s becoming difficult for the regulator to wade through and come out with a clear picture. But for this type of lending, especially in the unsecured space, it requires deep pockets,” said an industry expert.

At a time when the government is focussed on reducing its holding in PSU banks and consolidating positions, granting licence to a state-owned entity is purpose defying. Privatising IPPB or roping in private capital could also a contentious proposition. Then what?

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

With a specialised model for infra-financing through NABFID emerging, that could work for IPPB. But with the system having evolved disproportionately in the last 5-6 years, a long-term sustainable vision should be put in place before attempting any changes for IPPB version 2.0 to succeed.