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Banking on Incumbent Status

Getting Regulation Right Blog Aspect
Dr Archana Gulati
Published Mar 15, 2014
Updated Sep 03, 2023
Recently the Department of Post (DoP) has been in the news as regards its attempts to obtain a banking license. As analysts point out its one thing to have non-computerized make-shift rural post offices housed in a single room huts to deliver letters, but quite another to run a bank from such post offices. These rural branches lack physical infrastructure and human resource (with the requisite skill set) to run banking services. Even DoP’s attempts to tender for hand held devices to serve as mobile ATMs are unsuccessful apparently due to rudimentary specifications and infeasible terms and conditions.
The recent liberalization of banking in India is intended to attract  more players so as to inter alia make banking inclusive, but the postal department may not be the ideal candidate to do so.
The persistence of efforts by the DoP in this area is  more about a loss making incumbent postal operator trying to survive in the face of competition (from private couriers and broadband/email) by reinventing itself,  than about helping the banking sector thrive and ensuring that its customer base increases or is better served. It must be remembered that this reinvention is not costless and these costs including recruitment/retraining of staff, must be weighed against benefits. (This applies equally to National Broadband Plans like NOFN/BBNL that hinge on huge public investments in enhancing incumbent’s networks.)
This is exactly the sort of iffy policy that government’s should be wary off. Universal Service whether in banking, airlines or post or telecommunications should not become an excuse / for helping an incumbent survive. This is throwing good (public) money after bad. Not something a developing economy can afford. In the end economic efficiency must allow for creative destruction rather than endless and expensive preservation of redundant public investments