Government-owned India Post Payments Bank Ltd., once seen as a possible game changer for financial inclusion, has run into one trouble after another. First, rapidly changing technology made payments banks less relevant, and now a shortage of funds has led to a tussle between its management and employees.
On Jan. 5, the bank’s board, led by new chief executive officer J Venkataramu, decided to stay implementation of the Eleventh Bipartite Wage Revision for its employees for six months. This, after employees of the payments bank received the revised wages for November and December 2020.
In an email sent to employees on Feb. 1, 2021, Venkataramu said the payments bank has been facing capital constraints, which is affecting implementation of the bipartite settlement scheme.
“The board suggested that such a measure will help the bank tide over capital constraints,” Venkataramu said in his email to staff, reviewed by BloombergQuint. This, along with other austerity measures, can be used as an interim solution, the email said.
The management can go back to the board with a proposal to implement the new wage scheme after six months, the letter said, adding the bank was tapping all available resources, including external capital, to manage the situation.
The Eleventh Bipartite Wage Settlement is an agreement signed between the Indian Banks’ Association and bank employee unions for a period of five years between November 2017 and October 2022. It allows for 15% increase in the pay slip component during the period for the employees.
Denied the wage increase, the IPPB Officers’ Association filed a petition in the Delhi High Court on Feb 4. BloombergQuint has reviewed a copy of the petition filed by the association. Venkataramu’s email to employees is also part of the petition.
When contacted, Venkataramu declined to comment on the board’s decision or his email saying the matter is sub judice.
Is There A Capital Shortage?
The petition filed by the Officers’ Association questions the management’s claim that there is a capital shortage.
IPPB, the petition said, received capital infusion worth Rs 220 crore for the financial year ending March 31, 2021, of which Rs 75 crore had already been disbursed to the bank. In 2019-20, according to the latest IPPB annual report, the payments bank received Rs 335 crore in capital from the government through a rights issue.
As per the expenditure budget for financial year 2021-22, the government has set aside Rs 200 crore for capital infusion into IPPB.
This, the officers association said, suggests that shortage of funds cannot be blamed for the reduction and rollback of salary. Further, in the board meeting where the pay hike was reversed, the board also decided to appoint a chief technology officer at an annual pay of Rs 80 lakh, according to the petition.
The petition is now seeking relief from the High Court in the form of a withdrawal of the pay cut. It also asks that the payments bank continue to pay salaries under the new scheme till the matter is resolved.
According to a senior official at the payments bank, who spoke on conditions of anonymity, most of the capital which the bank receives from the government ends up being used for expenses related to bringing in new technology and staff.
The payments bank has awarded a contract for implementation of its dedicated and customised technology platform for an amount of Rs 801 crore, according to the FY20 annual report. The total cost of this contract, awarded in 2018, is spread over five years, which adds to the annual expenditure for IPPB, the official said.
The bank has also spent considerable resources in providing hand-held devices to 1.74 lakh postmen and Grameen Dak Sevaks, who are contractual employees of the Department of Post, providing doorstep banking services, the official cited earlier said.
IPPB: A Plan Gone Wrong?
Launched in January 2017, IPPB is a 100% government owned entity which provides banking services across India. The payments bank was licensed under the Reserve Bank of India’s initiative to start differentiated banking services in the country. A payments bank may provide remittance and fund transfer services to its customers and is required to invest 75% of its deposit base in government securities or treasury bills with up to 1-year maturity.
The bank had a deposit base of Rs 855 crore as of March 31, 2020, compared with Rs 94 crore a year ago. While total revenue during the year stood at Rs 54.7 crore, total expenditure stood at Rs 388.77 crore. The payments bank reported a net loss of Rs 334 crore for financial year 2019-20 compared with a loss of Rs 165 crore a year before that, according to the last available annual report.
As per RBI norms, a payments bank isn’t allowed to directly provide loans to its customers. It may however tie up with other lenders and act as a third party service provider.
In August 2019, the postal department announced its intention to convert IPPB to a small finance bank, allowing it to offer small loans to customers. This would have allowed the bank to open newer sources of revenue and have a more profitable venture. Later in November that year, Communications Minister Ravi Shankar Prasad informed the parliament that a task force had been set up by the government to study the logistics and feasibility of such a conversion. However, both the government and the postal department have been silent on the matter after that.
In December 2019, while releasing the guidelines for on-tap licensing of small finance banks, the RBI had allowed payments banks to convert themselves after five years of operations. Later in November 2020, an internal working group of the RBI had recommended an even lower three-year tenure for payments banks to apply for a small finance bank license.
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, who had consulted with the central government in 2011-12 on a plan to set up a universal postal bank said the IPPB experiment has faced considerable headwinds owing to the way it has been structured.
“A payments bank will always find it difficult to have strong revenue streams. But turning into a small finance bank isn’t the answer to this problem since these banks tend to have a more regional identity, rather than a pan-India presence,” Parekh said. Going ahead, IPPB could turn its fortunes around if it moves away from the Department of Post and brings in private investments, said Parekh, adding it could also consider converting to a universal bank.
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