Pros and Cons of setting up Post Bank

For A dak bank...

• It has a large rural network of 1,39,040 village post offices
• Has accepted deposits for decades—Rs 6.18 lakh crore in 2011
• Has established the trust of people, thanks to government backing
• South Africa and Japan have run successful post office banks
• Modest rollout plans, claims it’ll hire the best professional managers

...And Against It

• The post office has never managed the deposits it collects; FinMin does.
• The existing employees will resent outsiders—potential culture clash
• New construction etc needed to make post offices bank-ready
• Rural postal network manned by 1 lakh underpaid non-regular staffers
• Could face recovery issues, given the perception it’s an arm of government

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Jawaharlal Saha is one of India’s 40,000 postmen. Every day, he cycles with a payload of letters through the Mandi House area, in the bustling centre of Delhi. “On some days, the mail weighs 40 kilos. I might cycle around for say, five hours, and make repeat visits for Speedpost deliveries,” Saha says. Like other postmen, he sorts some mail, hawks insurance, sells stamps and pit­ches for the PO’s savings bank—tasks, he says, city postmen rarely have time for.

Saha’s busy schedule is not exceptional. Over the past decade,  the postal service has delivered lesser and lesser mail. It delivered 1,400 crore postcards, letters, newspapers, parcels and packets in 2001. This dropped to 660 crore in 2011, as private couriers captured the field. Simultaneously, the post office’s workforce dipped 30 per cent, from over 6 lakh to under 5 lakh. Its losses are roughly Rs 6,000 crore.

That’s why, about a fortnight ago, the department of posts delivered its biggest package ever­—a proposal to raise a bank, which is now under the Union cabinet’s consideration. Along with 25 corporate heavyweights, financial institutions and brokerage firms, the department of posts has thrown in its weight—and, many say, its fate. Backed by Union communications minister Kapil Sibal, this is part of the government’s three-pronged strategy: a government-run postal system to ‘regulate’ the sector; a public-private-partnership (PPP) model to develop its vacant land; and, crucially, the post office bank.

Six years ago, the department had suggested its transformation into a bank, but that wasn’t cleared by the Reserve Bank of India. At the time, India was not looking to approve new banks. This time around, there’s been a warm reception, with newspaper editorials giving the proposal a thumbs-up, citing its national reach and emotional connect with the people. But is that sufficient to make for a viable bank?

“The proposal is a very well-planned-out effort,” says Ashvin Parekh, partner and national leader, financial services, Ernst & Young. The global consulting firm was appointed by the postal department five years ago to suggest a revival plan. It suggested the setting up of a new company, the ‘Post Bank of India’. “Postal services are shrinking and finding it very difficult to fund their work, and face private sector competition. They have, however, achieved efficiency in small savings, which the proposal hopes to leverage,” he says.

Here’s the logic: all but 176 of India’s 1,54,866 post offices already provided financial services in 2011, and they have a great deal of trust-winning emotional appeal. For its various savings bank and certificate schemes, the postal department had a balance of Rs 6.2 lakh-crore in 2011, up from Rs 5.6 lakh-crore in 2007. “The popularity of financial products such as PPF and postal savings does not seem to have waned,” says S. Madhavan, a Delhi-based consultant, until recently a senior partner with PwC.

So far, post offices take deposits and hand over receipts. End of story. The finance ministry uses this money to fund the deficit or other projects. If the Post Bank of India is approved, post offices will start handing out loans, not just postcards. “There is no negative for investors if the post office opens a bank. They will benefit from streamlining,” says Calcutta-based financial planner Brijesh Dalmia. As a bank, the post office will have to follow KYC norms and conduct due diligence even on rural sources of funds.

There are precedents: South Africa has a post office bank, Japan has one. “Are there global examples of postal services becoming banks successfully? Yes. Is the task easy? No. In between these lies the truth,” says Neeraj Agg­arwal, a partner with Boston Consulting Group. He says the department’s wide reach and the fact that it has historically accepted deposits are its assets.

That said, it’s a long trek. “The rollout plans are, accordingly, modest,” says Parekh. Initially, no more than 50 to 200 post offices will become banks every year. So, for most Indians, the post office next door—there is one within 2.6 km of everyone—won’t transform overnight. Besides, only 24,100 post offices were computerised by 2011. “Core banking”, in which deposits show up on the ledgers instantly, is still a work in progress.

To be an effective asset manager, says N. Srinivasan, a Pune-based consultant who has worked with nabard and RBI, the post office will have to learn how to invest money, give loans to factories and village folk. It will also face an onerous task: collections. “Setting up a bank will prove a challenge. Today, people feel postal deposits are government deposits. Will this perception last when it becomes a bank? It’s to be seen,” he says.

The department will need Rs 500 crore to capitalise the bank, and as much more to hire staff­ (they propose bringing in a management team from the private sector), upgrade technology and train people. As 40 per cent of urban and 60 per cent of rural Indians are “unb­anked”, clients are expected to line up.

Given the enormous hold of the post, there are detractors, of course. CPI MP D. Raja says the banking plan basically ties in with the department’s effort to privatise this essential service. “The land and building development of postal department and all its services are being given a PPP push. In fact, this is an essential service and the government should see it in that light,” he says.

What could be equally troubling is that 89 per cent of the post offices’ mail delivery is handled by gramin dak sevaks, an agitated lot who are demanding pensions and salaries on par with postmen. Over 1 lakh post offices are “extra-departmental”—that is, the dak sevaks own the premises and get a pittance, if at all, as rent. S.S. Mahadevaiah, general secretary, All-India Postal Extra-Departmental Employees Union, says, “The department doesn’t have bank management experience, so it will hire outsiders. Recovery will be handed to us. If these E-D post offices become banks, the rent of Rs 100 (paid only to some) amounts to nothing.”

Like Saha, the dak sevaks regularly multi-task, collecting price-related inf­­o­rmation, managing NREGA acco­unts, hawking financial products and so on,  usually getting a small “incentive” payment. In this way, the postman himself has been reinvented. The Union ministry of statistics and programme implementation had roped in dak sevaks to collect commodity prices in 2010. “After initial glitches, the data flow has been smooth and useful for us,” says T.C.A. Anant, secretary in the ministry and India’s chief statistician.

Post office employees hope they will be part of the big new banking plans. So far, there are murmurs of training and rollout of handheld devices. Clearly, the bank won’t replace the post office just yet. But change is in the mail.

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Late in the evening of July 1, a press release from the Reserve Bank of India created quite a to-do. In a rare display of transparency, the central bank disclosed the names of all 26 applicants who had queued up for a bank license. While most of the names were expected, one unusual applicant stood out—the department of posts. Predictably, most newspaper columnists and commentators have commended this move. The acclaim and approval for the postal department’s future bank springs primarily from its one (and probably only) redeeming physical attribute—its enormous reach. According to India Post’s annual report for 2012-13, India has over 1.54 lakh post offices, of which close to 90 per cent are in rural areas. That makes it the world’s largest postal network.

This is a gigantic achievement. What’s more, given RBI’s unambiguous stipulation that new licenses will be granted on the basis of the applicant’s plans for financial inclusion, a new bank for the postal department seems like a nap bet. Its rural network presents the best financial-inclusion platform among all applicants.

But in realistic terms, it is unlikely that the Reserve Bank of India will grant a licence on the strength of the network alone. There are other drag factors. For one, questions can be raised about staffing. As on March 31, 2012, the postal department had 4,74,574 people on its rolls. Second, the central bank could allocate negative marks for the department’s financial health. The 2012-13 annual report put the department’s 2011-12 losses at Rs 5,806 crore. In 2010-11, it was Rs 6,345 crore. Ironically, operational expenses (Rs 8,720 crore) overshadowed the revenue receipts of Rs 7,899 crore. Sure, the government fills the gap every year, but that might not stop the Reserve Bank of India from asking questions about who’ll stump up capital for the bank year after year.

 

Third, most of the department’s products and services are priced way below cost. And, given the political sensitivities, it is unlikely prices can be raised. This can be a source of continuing anxiety for the central bank. There are many other reasons for RBI to look askance—state of technology, operational processes, skill sets. One justification trotted out is the assumed success of the postal savings and insurance schemes. The department is the custodian of a humongous Rs 6,05,697 crore in people’s savings. But the net annual loss  might induce the Reserve Bank of India to raise reasonable doubts about the security and efficient handling of savings.

The central question is: does India Post need to reinvent itself? The answer is: certainly. What shape could that take? The rural network, for instance, could turn itself into the country’s largest banking correspondent network. Second, it has the best database on Indians and could leverage that to provide authentication of KYC services. The postal department is one of India’s best institutions and it can definitely reinvent itself in a million different, and sustainable, ways. But a bank?

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Above is not our view it is collected from outlookInda.com