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Tuesday, July 30, 2013

Will Pin Codes Bring Profits?

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
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.

“We have really worked on our proposal, and we are hoping to get in-principle cabinet clearance for it. But I can’t say when.”Kapil Sibal, Union Communications Minister

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.

“Postal services find it hard to fund their work. But they are efficient with small savings, and the proposal leverages this.”Ashvin Parekh, Partner, Ernst & Young
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.

“The banking plan is in line with the idea of privatising the postal deparment, an essential service, through the PPP model.”D. Raja, CPI MP

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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