Today morning, the RBI gave in-principle approvals for payment bank licenses to 11 out of 41 applicants. While there are some big names there such as Reliance Industries, Aditya Birla Nuvo, Vodafone and Airtel, the most humble name in the list was the one with maximum connect to the objective of financial inclusion. Indian Postal Service.

Big numbers in small accounts

I went back to browse through the Annual Reports of the Department of Posts and found some interesting snippets on how the post supports the economic structure in India. As on 31st March 2013, there were 1,54,856 Post offices, of which 89.87% were in the rural areas of India. That is 1,39,164 branches in rural India, folks! The Post Office also operates several small savings schemes floated by the Government of India. The Post Office Savings Bank (POSB) handles 12.53 crore small savers’ accounts with an outstanding balance of nearly Rs.378 billion. And if we add the total balances outstanding under different savings accounts, recurring deposits, fixed deposits, PPFs, MNREGA accounts, etc., we are looking at a total outstanding balance of Rs. 6031.7 billion! Most of these deposits have been collected from the poor, unbanked areas, hence offering inclusivity to the chunk of our populace which finds it difficult to approach a bank, for whatever reason.

It would be interesting to compare this number to the rural branches of a big nationalized bank, say, SBI, I thought. And voila! Here’s what I find.

In 2013, SBI boasted  having 16,000 total branches, of which 9851 (around 66%) were in the rural areas. No bank comes even close in the actual number of villages/ rural areas that are covered by the Post Office. Interestingly, I found it exceedingly difficult to get data on savings deposits mobilized by the SBI in the rural areas. One rather oblique number that I found claimed that the rural deposits are roughly around 38% of the total deposits. This amounts to Rs.3600 billion. Thus, one comparison point that comes across is that the Postal Offices, which are not really banks, mobilize a tenth of the deposits mobilized by the SBI, whereas the number of branches of the Postal Services is 10 times that of SBI.

Is that small comparison telling us a deeper story? Perhaps, yes. Perhaps it is hinting at the tremendous potential of the post offices to offer financial inclusion to that section of the population that shies from commercial banking, for whatever reason.

The physical reach of the humble Post Office is definitely enviable; the next question is whether the Post Office has in it the wherewithal to function as a payment bank. It is fruitful to stop for a minute and reflect what a payment bank really does. It basically collects small deposits (to the tune of Rs. 1 lakh), invests in Government paper, disburses payments done through Government of India schemes, cannot really offer a loan, but would definitely offer the facility of a debit card or an ATM card. If you discount the last feature there, what you have is a full fledged description of the Indian Postal Services.

Postal Services and interaction with the Government

Since 2008, the Post Office was chosen by the Government to be an official agency to disburse MNREGA wages; in the year 2013, 57.4 million beneficiaries of the scheme were disbursed payments worth Rs.120 billion through the Post. The Department of Posts enjoys a seamless kind of an interface when it comes to networking with the Government of India. The pilot programme of the Direct Benefits Transfer (DBT) in Andhra Pradesh for disbursement of MNREGA wages and other benefits is being handled by the Post. Disbursal of pensions for several Government schemes is facilitated by the Post. The Aadhaar letters were booked and delivered under the Speed Post facility offered by the Department.

Very very interestingly, the Post Department helps the Ministry of Statistics and Programme Implementation (MoSPI) gather data in 1181 villages which feeds into preparing the CPI data for rural India! Thinking about it, it makes sense, doesn’t it? Who else, than the dak ghar, with a reach to the smallest of houses in the remotest of villages, to offer a sneak peek into how the prices of the basket of goods and services consumed by the rural folk are changing!

Since 2012, a computerization scheme of the postal network has started. The objective of this computerization program is not only to connect the postal network across the country to help track parcels and postal delivery instruments, but to also allow a platform for the Post Offices to get financially integrated into the overall payments system. Once this financial integration is completed, we may well be looking at one of the biggest potentials in Indian financial history to truly offer inclusivity to India.

Stories from elsewhere in the world

A quick look at some other postal case studies from other countries offers some lessons. The World Bank has published financial inclusion data after interviewing 65,000 participants from across 60 developing and developed countries. And there are some very interesting findings.

1. The data suggests that those people in the 60 countries who tend to have an account with a post office are likely to be older, poorer, less educated and not employed.
2. Most poor people who tend to hold a postal account also tend to hold an account in a commercial bank! Only 3% of the respondents were those who exclusively owned only a post account.
3. The success of post banks as a vehicle of financial inclusion depends on the business model followed. There are countries where the post office acts like an unlicensed savings bank (POSB, the kind of model we have in India currently), others where the post office has a tie-up with some established commercial bank, and yet others, where the post offices get a formal license to operate as a Financial Institution or a payment bank (this is the model we are now getting into).
4. Whenever there are partnership models between commercial banks and post offices, it has been observed that postal deposits do not actually increase; but this model does lead to an overall increase in the total number of accounts held by the poor.
5. More importantly, whenever the post office acts as a “cash merchant” for transactional financial services, such as electronic government and remittance payments, the number of accounts held by the poor is likely to increase significantly.

What does this mean for India?

To begin with, post office payment banks have a chance to make it real big in terms of the financial inclusion vision of the Government of India. If they could aggressively market the strength they have in terms of being the preferred institution through which the Government benefits are disbursed, it’ll give them the numbers to become a viable force in the initial few years. Over a period of time, these banks may have to explore the possibility of tying up with another Financial Institution to sustain the momentum of the earlier years.