Tuesday, October 8, 2013

Policy Watch: Post offices can fit into inclusive banking template, and here's how

Dear Comrades,

Within the next few weeks, the Reserve Bank of India will probably announce the list of parties who could set up new private banks. It is hoped that, this time at least, promoters like Ramesh Gelli (who was allowed to promote the now-defunct Global Trust Bank and was even awarded a Padmashri and Udyog Ratna by the government in 1980) will be avoided.
It is also possible that the RBI will not allow India Post (IP) to get a banking licence. This could be because of two things:

First, the reporting structure of IP will have to change, probably as a pre-requisite. IP currently reports to the Ministry of Communication and Information Technology. To be a bank, it must report to the RBI and to the ministry of finance.

Second, there are reasons to believe that IP has not yet become a first rate manager of money. This correspondent recalls how in 2003, when his postal life insurance policy matured, he was asked to bring a bag in order to collect the sum of Rs 1.4 lakh. The reason: the post office did not issue cheques, but would pay in cash.  It was common to see bundles of cash lie in steel cupboards (not vaults) in suburban post offices. Banks do not do this. Lately, IP has begun moving towards electronic clearing systems. But for the discipline to percolate will take some time.

But there are other ways in which IP could be used by the Indian banking service. 

After all, it is the only organisation that can boast of 1,54,866 branches countrywide, compared with just 92,117 branches that the entire banking sector (165 banks, including 82 regional rural banks) has. The largest Indian bank – the State Bank of India (SBI) – has only 14,902 branches.

More significantly, almost 90% of IP’s branches are in rural areas, compared to just 36% for the Indian banking sector (see table). But notwithstanding these advantages, IP loses money. In 2011-12, its total revenue covered only 57.6% of expenditure.  And it collects less money than Indian banks.

IP could, therefore, do with some more financial discipline. A good starting point could be for Indian banks to use IP’s branches as correspondent banks. This way, post offices could become extension counters of existing banks. After all, IP already collects money (almost Rs 80 crore daily), sells insurance policies and even mutual funds. It has  23.8 crore accounts – though banks with fewer branches have 81 crore accounts). It also provides money transfer facilities – it has tied up with Western Union for this. That is where extension counters, under the direct control of a bank, can play a significant role.

It would expose post offices to the discipline demanded by banks, and allow them to scale up towards financial discipline far more rigorously than is currently the case. And it would allow the Indian banking sector to increase its presence in rural India at lower costs.

SBI realised this when it tied up with IP a few years ago, to link 417 post offices in Maharashtra circle to undertake the opening of SBI bank accounts, acceptance of loan applications, enrolment for and delivery of smart cards, and sale of foreign exchange. IP later tied up with HDFC Bank too for sale and purchase of foreign exchange through post offices.

With the need for inclusive banking becoming more urgent, the role of IP could be phenomenal.  Using them for corespondent banking could be an easy way to ensure that transition. During this process, the restructuring of IP could also be addressed.

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