India Post best bet for financial inclusion

The Reserve Bank of India (RBI) wants to expand banks’
footprint in Asia’s third largest economy where roughly two
out of three adults don’t have access to formal banking
services. In April, RBI had given licences to two entities to
set up universal banks. It has followed it up recently,
releasing norms for setting up small banks and payments
banks.

The Indian central bank is extremely cautious in its
approach, and every “fit and proper” applicant cannot
expect to get the licence. No one can argue with this
stance, but slamming the door in the face of large
corporations and public sector enterprises is surprising. If
corporations could apply for full-service universal banks,
why can’t they apply for small banks, which pose much
lower risks to the system? Many of them who could not
make it in the April round would have loved to apply for
small banks, which can be upgraded to universal banks
after five years.

If both RBI and the Indian government are serious about
financial inclusion, the best way to do this is to allow India
Post to float a bank. The government has recently awarded
a Rs.1,370 crore contract to Ricoh India Ltd , a part of
Tokyo-based Ricoh Group, and Telecommunications
Consultants India Ltd , to modernize the India Post network
through automation, and improve the quality and expand
the scope of services. The next logical step should be
amending the Indian Post Office Act, 1898, and allowing it
to float a bank.

Globally, this has been done to expand financial services in
rural pockets and cover the poor and underprivileged.
Postal banks have made deposit and payment services
accessible to lower-income and rural households, and
contributed to raising household savings rates. The US and
Canada abolished their postal savings systems in the
1960s, while many other countries in Europe and Asia have
privatized or converted them into banks.

Postal Savings Bank of China Co. Ltd , the lending arm of
state-owned China Post Group Corp. , is planning to raise at
least $4 billion in an initial public offering in Hong Kong and
Shanghai this year. Ahead of the proposed public issue, it is
in the process of seeking strategic investors. It is China’s
fifth largest bank by assets and perhaps the world’s biggest
by branches with 39,707 outlets, over 70% of which are in
towns and villages.

Set up in March 2007 and headquartered in Beijing, it also
has 108,707 cash withdrawal service points, which last year
handled at least six million transactions worth $245 million.
Traditionally, China’s post office has served people in rural
pockets who do not have access to banking services and
offered them other services such as remittances, tiny loans
and even wealth management. Postal Savings Bank of
China serves at least 400 million customers across 31
provinces, municipal and autonomous regions through
innovative products such as specialized farmer cooperative
loans and land ownership loans.

Tokyo-based Japan Post Bank Co. Ltd , too, is planning a
public issue. It is one of only two banks to have branches
in every prefecture in Japan, the other being Mizuho Bank
Ltd . And, it has more offices (234 branches and 24,015 post
offices) than all other Japanese banks’ branches put
together. Set up in September 2006, Japan Post Bank is
primarily a savings institution that also offers overdrafts to
those who keep fixed deposits with it and a few other
financial services through its network of branches and
ATMs across the nation. In March 2014, its deposit portfolio
was in excess of 176 trillion yen, one of the largest among
global banks.

There have also been instances of commercial banks
taking over a postal service provider for the postal
department’s network, which comes in handy for reaching
out to retail customers. In 2010, Deutsche Bank AG took
over the control of Deutsche Postbank AG by raising its
stake. Through this, Deutsche Bank added Postbank’s 14
million customers to its 10 million German private clients to
become the country’s biggest private sector retail bank.
Headquartered in Bonn, Postbank was formed following the
restructuring of German postal services in 1990.
India Post is far better positioned than Postal Savings Bank
of China and Japan Post Bank with the largest postal
network in the world—at least 155,015 post offices, of
which 139,144 (89.76%) are in rural areas, much larger than
the entire branch network of Indian banks. On an average, a
post office serves 21.21 sq. km and a population of 7,175
people. In contrast, a bank branch serves little more than
12,000 people. On top of this, India Post has 573,749 letter
boxes strewn around the country. It has some 238 million
savings accounts—much more than what any bank in India
has under its fold.

Apart from mobilizing savings through various schemes,
India Post also sells mutual funds and pension products,
and offers remittance service from 205 countries across
the world from close to 10,000 post offices, through tie-ups
with Western Union Financial Services Inc. and MoneyGram
International Inc. The government also uses post office
accounts to route payments to beneficiaries as part of the
rural jobs programme and the direct transfer of subsidies.
Clearly, no other public or private entity can compete with it
in terms of reaching out to the rural masses and
infrastructure for distribution of financial products.
If RBI is not sure about Indian Post’s expertise in running a
bank—it has been incurring losses from its heavily
subsidized services—it should allow India Post to enter the
banking arena partnering a corporate entity. A bank by India
Post is the best bet for financial inclusion; it could do
much more than what a Jan Dhan Yojana can achieve.
Not a small bank—it will be the world’s biggest in terms of
branch network.

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