The Indian postal department is a veritable behemoth, with a network of about 155,000 post offices, the largest in the world. Nearly 90% of these post offices are in rural areas and it is estimated that on average each serves an area of 21.22 kilometres and a population of 8354 people. India Post therefore appears to be a natural ally for the Indian government and the banking industry regulator in their efforts to improve financial inclusion.
Nearly 40% of India’s population of 1.3 billion is unbanked, a significant proportion of which resides in remote rural areas that banks have struggled to penetrate. And apart from its vast reach, India Post’s Post Office Savings Bank (POSB), which operates small savings schemes on behalf of India’s Ministry of Finance, has more than 330 million account holders. At the end of March 2015, the outstanding balance of all savings schemes was more than Rs6190bn ($92.1bn), nearly half the size of deposits held by the largest bank in the country, State Bank of India (SBI).
It has nonetheless been an uphill struggle for India Post to enter the country's banking sector. As recently as April 2014, when IDFC Bank and Bandhan Bank received banking licences, India Post’s application for a full-service commercial banking permit was rejected. The Ministry of Finance reportedly had reservations because of India Post’s lack of expertise in relevant areas such as credit handling, as well as its financial health. With a vastly subsidised service in rural areas and falling revenues from money orders and stamp sales, India Post has been making losses for several years. Indeed, its deficit in financial year 2014-15 grew nearly 14% year on year to Rs62.58bn.
India Post gets licensed
In February 2015, however, Indian finance minister Arun Jaitley announced the government’s intention to promote financial inclusion using the postal department’s network. Banking regulator the Reserve Bank of India (RBI) then gave India Post an in-principle approval to set up a 'payments bank' along with 10 other entities. These include corporate giant Reliance Industries Limited; leading mobile network provider Bharti Airtel; telecom major Vodafone M-pesa; India’s largest depository, National Securities Depository Limited; and mobile payments company PayTM.
Payments banks are a new category of differentiated banks in India that are designed to offer a limited set of banking services such as accepting demand deposits up to a maximum of Rs100,000, issuing debit cards and distributing simple financial products such as mutual funds and insurance products. Lending is not included in this suite of services, which shields payments banks from one of the main risks faced by traditional banks. From the regulator’s perspective, the main objective of payments banks is to further financial inclusion by providing small savings accounts, remittance services, utility payments and direct benefits transfer (DBT) of social security payments to low-income households, migrant labour and other unorganised sector entities.
“The postal department is well suited to the payments bank model because the key criterion for a payments bank is the ability to reach a large number of people,” says R Gandhi, RBI deputy governor. “The major advantage is the reach. The vast postal network can help provide a physical presence in remote areas.”
Joydeep Sengupta, senior partner and head of Asia-Pacific financial services at global consulting firm McKinsey & Company, agrees. “The biggest advantage of India Post getting into the banking system is [its] network and scale. The trust and brand equity that the post office commands is a big plus. Additionally, the postal department has been in the financial services business for a long time,” he says.
In June 2016, India’s Union Cabinet formally approved a corpus of Rs8bn towards setting up India Post Payments Bank (IPPB) as a 100% government-backed venture. IPPB will have its own chief executive and will be professionally managed. A government press release says: “The IPPB will obtain a banking licence from RBI by March 2017, and by September 2017 its services will be available across the country through 650 payments bank branches, linked post offices and alternative channels riding on modern technology including mobiles, ATMs, point-of-sale/mobile point-of-sale devices, etc and simple digital payments.” According to local media reports, IPPB plans to set up 5000 ATMs and will be scaling up to cover the entire country by the end of fiscal year 2019.
Global model
Outside India’s borders in countries such as Germany, South Korea, Japan and China, post offices also offers banking services. A key difference between India Post and other post office banks, however, is that the latter are mostly universal banks with both deposit and credit facilities. Nonetheless, India Post is closely aligned with the banking model adopted by Korea Post, the national postal service of South Korea, according to Madhumita Das, deputy director-general (Post Bank of India) at India’s Department of Posts. Korea Post offers its own banking service and facilitates transactions related to other banking entities.
Similarly, India Post will include both IPPB and POSB. They will be different brands and will be largely complementary in their offerings, says Ms Das, who adds that some of POSB’s savings customers might migrate to the payments bank. However, Ms Das expects most of its popular products, such as recurring deposits and deposit schemes for children, to remain untouched since these products are out of the purview of the payments bank.
The payments bank services, on the other hand, can be linked to loan accounts and insurance accounts enabling automatic payments. “The payments bank will target a larger ecosystem,” says Ms Das. “IPPB will cater to customers that have traditionally not appealed to formal banking channels.” She points out that since nearly 60% of India’s rural population is outside the financial system and India Post’s rural network is nearly three times the outreach of all the banks put together, there is tremendous potential. As of the end of March 2015, India Post had a network of 139,222 rural post offices and 261,162 gramin dak sevaks (extra departmental agents responsible for managing the rural post offices).
Core banking platform
In the past few years, India Post has been implementing a core banking solution for the POSB, linking up post office branches and facilitating transactions through digital channels. More than 20,000 post offices are already connected to the core banking platform. Every post office will act as access points for IPPB, and postmen will play a key role in spreading the message of IPPB, according to Ms Das.
The plan is to provide the gramin dak sevaks and postmen with hand-held devices that will not only enable them to provide “doorstep banking services” but also help customers with conducting digital transactions. “IPPB will facilitate people to migrate to digital transactions; reliance on cash will go down. Rural India will completely leapfrog urban India,” says Ms Das.
And while competition between payments banks is expected to heat up, Ms Das believes that India Post’s value proposition sets it apart. “Our two main unique selling points are reach and trust. Our rural network is a key differentiator that will enable IPPB to provide the deepest outreach worldwide. With its numerous points of presence, it will be a game changer in the banking industry,” she says.
Cautious optimism
While most industry experts acknowledge the immense potential of the postal department’s foray in the banking sector, they inject a note of caution too. The challenge for India Post entering the banking business is “culture”, says McKinsey’s Mr Sengupta. “The postal service is plagued by double the lethargy that ails public sector banks. Its biggest challenge will be to overcome that culture and become competitive,” he says.
Meanwhile, RBI’s Mr Gandhi believes IPPB will get the right people and processes in place, but he underscores the importance of getting a bank’s fundamentals in place. “The POSB has provided the postal department with some experience. However, running a payments bank will require in-depth banking experience in areas such as treasury management. Getting the appropriate technology infrastructure in place will also be a challenge,” he says.
Abizer Diwanji, leader for financial services at EY India, agrees that connecting all post office branches to a single core banking platform will present a significant technological challenge, and says that while the postal department’s distribution levels are excellent, operating in the banking domain requires banking expertise.
India Post has embarked on an exciting journey where success lies in leveraging its vast postal network to efficiently offer banking services. A change in orientation will be important. “How well India Post is able to manage the transition from being a post office to becoming a bank is key,” says Mr Diwanji.
