The vast postal network can boost financial inclusion. A task force has made a case for a postal bank of India too. Will it become reality soon?
Shishir Tripathi | June 12, 2015 | New Delhi
Soon after the 1998 Lok Sabha elections when Atal Bihari Vajpayee went to meet president KR Narayanan to stake his claim to form the government, he was asked to produce letters of support from allies. AIADMK chief J Jayalalithaa played truant. Her letter of support landed after a few days of ordeal and Vajpayee quipped, “Chitthi aayi hai”, in his characteristic way, quoting the famous Hindi film song, before he was asked to form the government by the president.
A poet PM like Vajpayee would be well aware of the significance of letters and post office. But incumbent prime minister Narendra Modi runs his government in an era of instant messaging and, unlike Vajpayee, is not known for his accomplished poetry. Yet, Modi has given enough indication to restore the importance of post offices in social life.
Commenting on the importance of the postal department, Modi tweeted on January 7, “Spoke about the need to use assets of the Posts Dept for people’s benefit. Post offices must be used effectively to provide services to citizens.” The PM was reacting after he was presented the report of the former cabinet secretary TSR Subramanian-led task force that has suggested setting up of three subsidiaries under the department of posts (DoP) which would engage in banking services. Another important recommendation was to establish a Post Bank of India (PBI) as a separate entity with a branch in each district in the first three years with an initial capital of '500 crore, to be allocated by the government.
A senior government official said the PM was positively disposed on the recommendations but the final deliberations would take some time.
The Indian postal department has had to bear the constant onslaught of technological innovations in the last few decades. Only someone belonging to the pre-internet era could really tell about the anxiety caused by the arrival of a ‘taar’ (telegram) and the glee on the face of someone receiving a money order. Last year, when the telegram service in India was slipping into the pages of history, people lined up at post offices to send their last, or even their first, telegrams. For most, the 169-year-old service evoked nostalgia, as the harbinger of good news – ranging from being selected to a coveted government job to being blessed with their first child – and, at other times, informing about a death in the family miles away.
Money order too, say newspaper reports, might be headed the same way, as it has yielded ground to instant money transfer instruments.
Technology seems to be challenging all three dimensions of traditional communication channels – speed, distance and time. Is it then time-up for post offices?
Pose the question to anyone who is part of the service and an assertive rejection of any talk hinting at its redundancy will follow. The reason might range from it being the only service provider which ensures ‘last-mile connectivity’ to smart governments across the world reinventing post offices to provide banking services to their people.
Recommendations of the task force on leveraging post offices support these transformations and the new role played by post offices.
Post Bank of India
In an attempt to reinvent itself, DoP, along with 24 other financial entities, applied for a licence to enter into universal banking in 2012. The DoP is also one of the 41 applicants for setting up payments banks. In April 2014, while granting an ‘in-principle’ approval to IDFC and Bandhan Financial Services for universal banking, RBI set aside the application of the DoP to be decided separately.
The finance ministry and RBI felt that there were “innate differences between post offices (POs) and the proposed PBI” and that “the physical branches of POs are not as relevant for leveraging on the distribution network for the PBI as the human capital in handling unique and complex financial functions and products, including risk management, asset liability management, treasury management, interest rates and forex products.”
“This is not a valid argument. When a new entity is created, obviously a new organisational structure is put in place. When post offices will enter into banking function, people with required skills will also be recruited,” said a senior official of the postal department who did not want to be identified.
It may be noted here that in November last, the DoP issued a circular in which public sector banks were directed to “explore the opportunity of utilising the vast network of post offices in the Pradhan Mantri Jan-Dhan Yojana (PMJDY)”. The circular stated that the DoP was asked to share a list of about 2.5 lakh gramin dak sewaks with the department of financial services.
According to some stakeholders, the government’s inability to appreciate the role that the huge post office network can play in providing ‘last-mile connectivity’ will only affect its task of ensuring financial inclusion.
Countering the government arguments the task force report states, “the task force recognises there are general apprehensions in many quarters that rural lending is a risky proposition and that any new organisation would not be able to induct adequate expertise to manage the credit and lending process in a credible manner. This view is clearly based on unhappy experiences in this regard, relating to RRBs, cooperative banks and other similar experiments which have been tried in the past.” It, however, goes on to attribute these problems to structural constraints like lack of local knowledge and inability to insulate these agencies from outside pressures.
The argument of the ‘risk factor’ being flawed becomes obvious when one looks at the number of frauds and lost cases reported during 2013-14 for the post office savings bank (POSB). There were only 634 such cases, involving '21 crore – 0.0000035% of the total deposits. When compared to non-performing assets of public sector banks, the amount is negligible.
The public investment board (PIB) of the finance ministry, while restraining the proposed PBI from getting into full-fledged lending business, suggested it to try different routes like tying up with commercial banks. This would help them share its existing infrastructure at the grassroots level without becoming vulnerable to financial risks due to its lack of experience in the area of credit services. Another suggestion was for the proposed PBI to become a business correspondent (BC) to the SBI or some other commercial bank.
The huge network of post offices could be used for all the above, but denying it universal banking licence still lacks coherent logic.
Commenting on the role the postal department could play, task force chairman Subramanian said that as banking and financial services were not available in most of over six lakh villages of the country, it was felt that a ‘Post Bank of India’, which would be professionally organised, should contribute for financial inclusion of the rural poor. He also said the move could create over five lakh new jobs over the next three to five years. He pointed out that state governments were also keen on implementing the recommendations of this task force.
With the launch of the PMJDY and financial inclusion being the utmost concern of the government, the role of post offices becomes even more important, as even the largest bank, the State Bank of India, has fewer branches than post offices.
The task force report states that the PMJDY “depends heavily on banks to reach villages – (surprisingly the postal network was left out, possibly inadvertently) – it remains to be seen as to how successful this will be, given the nature of the issues, as well as the characteristics of the rural financial scene, along with the structural features of large banks”.
“The postal network,” says the taskforce report, “coupled with new technology, now provides a renewed opportunity to achieve in the field what we have failed to do so till now. The task force is of the firm view that real financial inclusion will not be possible till we effectively bring the rural post network into play.”
Consider this: India Post has the largest network in the world with over 1,54,882 POs (March 31, 2014). Nearly 90 percent of POs in India are located in rural areas. Postmen and postmasters are respected figures in the social life of villages and can serve as an effective tool for ensuring know-your-customer (KYC) norms. The PM also reiterated this view when on January 7 he tweeted: “A postman, along with a teacher is the most respected Govt. employee in rural areas. This is not a small feat.”
On whether it was possible for postmasters and other field employees of the postal department to act as business correspondents (BCs), PN Ranjit Kumar, deputy director general, department of posts (transferred since), said, “They can act as ‘super business correspondents’. They have been part of the government system and can be used for higher-end services.”
Further commenting upon the way post offices are used across the world, Kumar added, “Post offices have to be seen as an inheritance. It is a network with high-calibre governance and all over the world they are use for higher-end tasks.”
The Postal Savings Bank of China Company Ltd (SBC) does not act as a complementary institution to commercial banks. It is rather China’s fifth largest bank by assets and one of the world’s biggest in number of branches. In June, its expansion plan stunned even the most successful commercial banks of China when it declared its plan to raise Renminbi or RMB 4 billion in an initial public offering in Hong Kong and Shanghai. The SBC was set up with an initial capital of RMB 20 billion in 2007 from the State Post Bureau. Today, it has RMB 1.5 billion in deposits and the second largest number of branches, after the Agricultural Bank of China.
With an impressive claim of being one of the two banks to have branches in every prefecture in Japan, the Tokyo-based Japan Post Bank Company Ltd is yet another example of the post office being leveraged for banking services.
Bonn-based Deutsche Post Bank too has a huge customer base.
The Mauritius Post and Cooperative Bank (MPCB) Ltd was set up in August 2003 following the merger of the New Co-operative Bank Ltd with the Post Office Savings Bank. The MPCB offers personal banking, corporate banking, trade finance and treasury services, through its network of branches and ATMs.
The road ahead
With the prime minister acknowledging the role post offices can play in “service delivery”, some headway could be expected in the coming months. The task force report also states that after some deliberation RBI has “appeared to agree that the PBI may enter into credit operations after a trial period during which the new entity could establish its viability, gain experience in the new sphere of operations, train its officers and gradually prepare itself to offer the full bouquet of banking and financial services.”
Further, DoP recently expanded its banking functions when it amended the POSB General Rule and issued ATM cards to its savings account holders. Though the service will be available only in post offices that are on the core banking solution (CBS) platform (676 at present), it is a big step forward in equipping post offices with full-fledged banking functions. Batting for universal banking, the task force says, “India Post already has a readymade network, which has been functioning for over a century. It also has the POSB that has been functioning as a payments bank for over a century. The 1.4 lakh rural PO branches can immediately be brought into play as BCs to the proposed PBI.”
What is being proposed is that the institutional advantages of all-India reach, public trust and the KYC knowledge of POs/postmen should be leveraged by setting up PBI as a full-fledged bank operating across the entire spectrum of banking and financial services in hitherto unbanked/under-banked areas, thus furthering the national objective of financial inclusion.
“The task force is of the view that the PBI should be set up under an act of parliament and that establishing PBI as a statutory institution and a government bank would enhance its credibility, insulate it from local pulls and greatly facilitate its operations,” the report said, indicating that the RBI need not be approached for setting up this entity.
While it cannot be disputed that experts will be required to manage financial operations of the proposed banks, but mere absence of them cannot be the reason for not using the widespread network and administrative experience of the age-old institution.
Even though nothing has moved in this direction yet, finance minister Arun Jaitley strongly indicated good times ahead in his budget speech in which he referred to the postal network as a possible payments bank.
The finance minister announced that the postal network with 1,54,000 points of presence spread across villages will be used to increase access to the formal financial system. “I hope the postal department will bring the proposed payments bank venture successfully so that it can contribute to the Pradhan Mantri Jan-Dhan Yojana,” said Jaitley. It is ‘achhe din’ for the postal department then.
(The article appears in the June 1-15, 2015 issue)
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