Friday, June 6, 2014

India Post as a banking platform

Dear Comrades,

This hoary institution need not turn into a bank. But its rural outreach can help in financial inclusion.

India Post has not been granted a banking licence in the current round of allocations. The Reserve Bank’s opinion is that the issue needs more analysis and the Government needs to be consulted. 

In view of the fact that commercial banks have recorded high non-performing assets, their earlier efforts at extending financial inclusion cannot be easily replicated. 

Therefore, banks could now consider exploring possibilities with post offices, with a spatial reach, a high level of public trust, a wide customer base and generally well respected staff. 

Letters from the past
The Indian postal system has an illustrious history tracing back to the origins in the Mauryan era. The modern postal system was established and strengthened by Lords Robert Clive and Warren Hastings and the GPOs in Calcutta, Madras and Bombay were established in 1774, 1786 and 1793, respectively. 

As of March 31, 2012, there were 1,54,822 post offices in the country, making it the largest network of its kind in the world, of which 90 per cent were in rural areas. In comparison, at the time of Independence, there were only 23,344 post offices, most of which were in urban areas. 

Historically, the first postal account was opened in the UK in 1861 to encourage the poor to save. The same began in India, soon after postal savings banks started — in 1882. 

Eventually, by 1896, post offices were the sole savings bank agencies mobilising small savings. They have been in the forefront of offering not only different types of banking facilities such as time and recurring deposits but also offering certificates of different denominations and social security schemes. 

In India, there were nearly 24 crore account holders availing postal banking services at the end of March 2012. 

In contrast, there were nearly 90 crore deposits and 13 crore credit account holders in commercial banks of which 28 crore deposits and 4 crore credit account holders spread in 35,936 rural branches accounted for 9.4 per cent and 7.9 per cent, respectively of the total amount of deposit and credit of commercial banks. 

Financial inclusion
To enhance financial inclusion, post offices with significant presence in rural areas offer promise. 

But to achieve that, should India Post metamorphose into a commercial bank or explore possibilities with banks suffering from sagging assets?

Internationally, there are a few countries which have tapped the postal institution for extending financial inclusion.

For instance, in Brazil, financial inclusion got a boost after Brazil Post formed a partnership with financial institutions. 

Some countries have even offered a banking licence to their post offices (China, France, Morocco), while in some other countries banking institutions have made working arrangements to offer services through the post offices (Algeria, Italy and the UK). 

However, some of the important criticisms against making a bank out of postal institution are lack of technology, different work culture and experience, and staff constraints such as skills, training and computer literacy levels. 

In India, the contribution of small savings, despite concerted efforts by the Government since 1951, has been comparatively small compared to deposits with commercial banks, mainly because of the lack of ability to save and financial literacy amongst the segment of the population which banks with post offices. 

Converting post offices into banks would not change that situation. Incidentally, nationalisation of banks — in 1955, 1969 and 1980 — was initiated to enhance banking penetration in rural areas, but that did not meet with significant success, given the work culture and skill levels of banking staff.

Saving more
However, the need is to inculcate banking habits in the rural unbanked population. For that existing infrastructure in post offices could be usefully explored successfully in different ways. 

Since there are fewer rural bank branches than post offices, the costs of transacting business with banks are fairly high. 

Banking services available at post offices, through time-specific extension counters of major commercial banks in the local area or the presence of business correspondents of banks, could reduce such costs and increase banking penetration.

To initiate banking habits with the rural population, post offices could start offering debit cards to account holders of postal bank accounts as well as providing information on those accounts through password protected internet portals. 

Post offices could also facilitate use of electronic cards, credit and debit, for postal transactions for not only convenience of the user but also to encourage the use of banking facilities. 

This would enhance the financial literacy and awareness of banking services for the unbanked population.

Banks could make arrangements with post offices for dealing with remittances, as recommended by the Rangarajan Committee on Financial Inclusion in 2008. Similarly, banks could be invited to locate their ATM machines in the premises of the post offices. 

While the use of plastic currency will make transacting easier and encourage banking habits among the unbanked population, it will also monetise the economy and help bring down the demand for currency notes and scarce coins significantly. 

India Post has touched the life of every Indian. To preserve its heritage and extend its glory, post offices need not become banks, but could certainly consider a symbiotic business partnership with commercial banks to enhance financial inclusion and mobilise deposits.

The writer is RBI Chair Professor of Economics, IIM Bangalore
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